The supply side of insurance

Sheenu Jhawar -

ALthough the demand for health and more specifically the demand for medical care is governed by high uncertainty with respect to the incidence of illness, quality of product and prospects of recovery, certain rationales can be applied to develop an understanding of the same.

To embark upon a logical model of ascertaining medical demand let us say that we have a database on the burden of disease in the country, we are also aware of the demographic shifts and can extrapolate them. Then again discounting for expected moral hazards can be done. The resultant calculations should provide an estimate of medical demand for the specified time frame.

This in my mind constitutes a baseline data for mapping the expectant claims, (adapted to regional levels), and henceforth an intrinsic part of chalking out the premium levels/ enrolment numbers, for an insurance policy. Give or take a few, why then are the claim ratios and claim figures such an unexpectedly large problem for the insurance sector?

To me, the answer lies in the wake of a ‘non policy’ on any kind of a regulation on remuneration to the supplier and a more than occasional occurrence of supplier induced demand (SID). The unanswered question seems to be: “What are the mechanisms of payment that motivate and provide an incentive to the provider for delivering cost efficient quality care?”

Until now the market competition has regulated the price of services in the hospital sector. Few hospitals have indulged in rational models of costing. But even that has worked to the advantage of the patient because even though the price of the hospital services is high in absolute terms, relatively, it has struggled to be competitive.

Every hospital has had an interest in providing cost effective services and in a way it has even been the marketing strategy of a hospital. However with the advent of insurance and third party payment system, the scenario has changed. Since the premium which the patient pays, is only a percentage of what he would actually accrue in future, when such an opportunity arises, the patient utilises the hospital services readily in order to maximise his utility, (sometimes to the extent of creating moral hazard).

On the other hand the hospital has an incentive to ‘create’ the supply induced demand, because the payment is being done by a third party, committed to settle the ‘claim’. Thus the overall demand, and the cost per demand increases thereby providing a claims challenge for the insurance company.

Therefore, even though the rate of claim has increased by only a certain amount, in actual fact the figures preceding the decimal have increased substantially. Recently a study analysing 621 claims and reimbursements pertaining to policy initiation years 1997-1998, and 1998-1999 of the Ahmedabad branch of General Insurance Corporation (GIC) by Prof Ramesh Bhat et al points out that: “It is a well known fact that hospitals have been overcharging patients specially those who have Mediclaim cover.”

The authors also point out that the findings of the study imply that the claims are highly vulnerable to provider induced use of resources. Provider/ supplier induced demand is the magnitude of demand created by medical practitioners which exists beyond what would otherwise have occurred in a market in which consumers are fully informed.

The third party payment system aggravates the situation whereby the doctor/ hospital does not have to bear the full cost of clinical decision making. The resultant factor is rising medical bills and increased claims in number and figures.

We have moved one step ahead with IRA bill but the entry is far from complete yet. The bill needs to be accompanied with regulations on its remuneration and payment policies, apart from others. That is a key role that regulation can play in this sector. There could be three main methods of paying doctors and other healthcare professionals:

1. Fee for service: The traditional method for financing health services pays physicians and hospitals for each service they provide. Fee-for-service is the system of payment used by conventional insurance plans. The fees may be paid directly either by the patient or the third party which have been negotiated with.

There may exist competitive prices. However where third party is involved there is an incentive to over treat or create the supplier induced demand.

2. Capitation method of payment: Under capitation, providers — hospitals and/or physicians — agree to accept a set advance payment in exchange for providing health care services for a group of people, usually for a year. Hospitals and/or physicians receive payments per member per month for a comprehensive set of services, or for a more specialised service, such as cardiac care. Whether a member uses the health service once or a dozen times, a provider who is capitated receives the same payment. In this case there would not be an incentive to overprovide the services since the fees per service will not vary.

However from the purchaser’s point of view, moral hazard would still exist, because he would still want to maximise his utility by making as many visits as possible. Perhaps, this is the reason why many insurance companies do not want to venture into any outpatient treatment plans. OPD is an area where highest moral hazard may exist.

3. Salary: The payment is based generally on the specialisation, grade, age, responsibility and experience of doctors, and is fixed for a given period of time. In this case, a new problem emerges, that of incentive to under treat and shift the cost.

4. Payments and regulations of hospitals under insurance plans: Depending on what system an organisation adopts to reimburse the hospitals/ healthcare professionals, it might greatly influence the workload thereafter. Perhaps the government ought to take a stand and make some standardisations for healthcare reimbursements, in order to address the problems of high claim ratios and escalating costs.

In the light of these problems if the industry is looking at the option of increasing the premiums, it would be a catastrophic step to take, and will herald near closure of most mushrooming organizations due to diseconomy of scale apart from other factors.

Policy decisions have to be based on the root causes to the problem. Several models have been practised in the developed world, in the context that these are the countries that have up and running insurance plans, and have gone through all theses problems in their past.

Rather than reinvent the wheel, we need to rake up the past, and see how the problems within can be encountered and approached.

(The author is clinical auditor, Mid Stafford General Hospital, UK. She may be contacted at sheenujhawar@yahoo.com)