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Chapter 1: Introduction to Health Insurance

Certificate in Health Insurance























































Confidentiality statement

This document should not be carried outside the physical and virtual boundaries of TCS and
its client work locations. Sharing of this document with any person other than a TCSer will
tantamount to violation of the confidentiality agreement signed when joining TCS.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that may be appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.
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Contents

Chapter - 1 Introduction to Health Insurance .................................................................... 4
Introduction ...................................................................................................................... 4
1.1 What is Health Insurance? ...................................................................................... 5
1.2 History of Health Insurance....................................................................................6
1.3 Milestones in Evolution of Health Insurance ..........................................................6
1.3.1 United States: ....................................................................................................6
1.3.2 UK ...................................................................................................................... 7
1.3.3 India: .................................................................................................................. 8
1.4 Necessity of Health Insurance ................................................................................ 8
1.5 Benefits of Health Insurance ..................................................................................9
1.6 Additional Benefits of Health Insurance ............................................................... 10
1.7 Rising Healthcare costs a driver for transition to Health Insurance....................... 11
1.8 Comparative analysis of Healthcare spending ..................................................... 13
1.9 Public Health and Aging ...................................................................................... 14
1.10 Inherent Problems in Health Insurance Markets .................................................. 14
1.10.1 Moral hazard ................................................................................................ 14
1.10.2 Adverse selection ......................................................................................... 14
1.10.3 Covariate risks .............................................................................................. 15
1.10.4 Information problem .................................................................................... 15
Summary ........................................................................................................................ 16
References ...................................................................................................................... 18

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Chapter - 1 Introduction to Health Insurance

Introduction
Since ancient ages, the saying goes health is wealth. And perhaps that is true, today you
spend a fortune if a health problem arises. To keep the fortune and meet the expenses of
the healthcare, insurance has emerged as an ally. Health Insurance plays an important role
in the global economy today with innovative products and services. Particularly it is a useful
risk mitigating tool. This chapter provides an overview of the healthcare industry from its
nascent stages to its current scenario in the world economy. In this chapter we will identify
the key events in the evolution of Health Insurance.

Learning Objectives
On completion of this chapter, you will understand the:
Healthcare reimbursement / Health Insurance
Evolution / Milestones in Health Insurance
Purpose of Health Insurance
Benefits and drivers of Health Insurance

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1.1 What is Health Insurance?

Health Insurance is also known as medical insurance, accident and health insurance or
sickness and accident insurance. It covers all types of disability, loss of income, medical
expense and accidental death. It can be defined as any form of insurance whose payment is
contingent on the insured incurring additional expenses or losing income because of
incapacity or loss of good health. In medical insurance, benefits become payable on
disability as a result of accident or sickness. Health insurance can address the problems
related to rising medical expenses.

Health insurance is a kind of insurance wherein the insurance company pays medical
expenses of the insured in case he/she falls sick due to causes covered. It may also cover
expenses when the sickness is due to accidents. Such insurance results in faster healthcare
facilities to the insured. For example, when someone is suffering from cancer, expenditure
is very high and medical care could be for an extended period of time. A person may not
have the resources normally for such conditions, but insurance can help pay for all such
expenses.

Health insurance functions as a shield against rising medical costs. As any other insurance,
health insurance is also a contract between the insurer and an individual or group (proposed
insured), wherein the insurer agrees to provide health insurance at a given premium. Based
on policy type, premium can be paid in regular installments or in lump sum. The insurance
policy is a contract renewed annually.

Health insurance is based on the principle that what is highly unpredictable to an individual
is predictable to a group of individuals.

Health insurance expenses could be paid in two ways either as a direct payment or
reimbursement for expenses paid by insurer for illness and injuries. The extent of expenses
and kind of illnesses covered depends on the policy and insurance company.

When health insurance claims are made, the individual policy-holder needs to pay a
deductible and co-payment. For example, hospitalization may need that the first $100 of
fees has to be borne by the insured and also $50 per night charge for hospital stay.
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Health insurance policy often mentions what medical benefits are offered including tests,
drugs and treatment services. The insurer agrees to cover expenses relating to certain
benefits mentioned in the policy. These are termed "covered services."

Health insurance is also at times clubbed with other plans such as pensions, life insurance
which is sponsored by the employer.

Health Insurance may fall under the category of both Life as well as General Insurance, it
can be termed as Life when the insurer indemnifies the insured in case of loss of income due
to health constraints, where as it is termed as General or Non Life when insurer pays/
reimburses the medical expenses of insured.
1.2 History of Health Insurance

Health Insurance evolved with the advancements in healthcare and inventions in the field
medicine. Health insurance concept was pioneered by Hugh the Elder Chamberlen from the
Peter Chamberlen family in 1694. Also in 17
th
century medieval guilds in Germany had the
solidarity-based relief funds. In the latter part of 19
th
century, health insurance was provided
in the form of disability insurance, as it covered only those which caused disability.

In 1883, Germany passed the first ever national compulsory health insurance law. The
compulsory health insurance idea spread slowly from Germany, accelerating after the turn
of the 20th century. Today, over 60 nations have some form of compulsory governmental
program. The programs vary widely, and some allow private insurance to supplement the
governmental program.
1.3 Milestones in Evolution of Health Insurance
1.3.1 United States:

Year
1850 - Franklin Health Assurance Company of Massachusetts started providing accident
insurance, to cover injuries related to railroad and steamboat travel.
1890 - First individual disability and illness policy
1929 - First modern group health insurance plan was formed
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1939 - American Hospital Association (AHA) started a non-profit organization called Blue
Cross to designate healthcare plans
1946 - Physician-sponsored plans combined to form Blue Shield
1940s - 1950s - Employee benefit plans introduced and unions bargained for better benefit
packages, including tax-free, employer-sponsored health insurance.
1965 - Government initiated Medicare and Medicaid programs
1980s - 1990s - Employer-sponsored group insurance plans switched from fee-for-service
plans to the cheaper managed care plans.
1993 - Healthcare reform plan that guaranteed health insurance for all Americans
1996 - Mental Health Parity Act (MHPA), to require some employers to offer health plans
with psychiatric benefits and also Health Insurance Portability and Accountability
Act (HIPAA)
1997 - The State Children's Health Insurance Program (SCHIP), was established by the
federal government to provide health insurance to children in families at or below
200 percent of the federal poverty line
2010 - The Patient Protection and Affordable Care Act was enacted for introducing
mandated health insurance with reforms designed to eliminate some of the worst
practices of the insurance companies




1.3.2 UK

Year
1832 - British Medical Association (BMA) was founded
1911 - National Insurance Act was introduced
1930s A conventional mix, 90% of the workforce had social insurance and the other 10%
and all dependants either had private insurance or made full out-of-pocket
payments
1942 - Beveridge Report recommended a service that was universal (covering all people)
and comprehensive (covering all needs)
1946 - National Health Service (NHS) was founded
1948 Hospital System was nationalized
CMS (Center for Medicare and Medicaid Services) predicted that Americas national health
spending would grow at 5.8 percent annually from 2010-2020, while its GDP is witnessing an
average annual growth rate of 3.8 percent.
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1990 - National Health Service and Community Care Act was passed to set up independent
Trusts that managed hospital care
1.3.3 India:

Year
1912 - Insurance Act, 1912 passed to regulate Insurance Industry
1923 Workmans Compensation Act passed to provide relief to factory workers in case of
factory accidents
1938 Insurance Act, 1938 passed. Categorization:-Life & Non- Life Insurance
1948 - Employees State Insurance (ESI) Act passed for welfare of workers & dependants in
organized sector for sickness, death and maternity.
1954 - The Central Government Health Scheme came into existence covering all the Central
Government employees.
1956 - Life Insurance industry nationalized and Life Insurance Corporation of India (LIC) was
set up.
1972 - General Insurance industry nationalized; General Insurance Corporation of India (GIC)
came into existence. Existing private companies merged into 4 companies namely: -
NICL, NIACL, OICL and UIICL.
1981 - GIC offering Limited Hospitalization Cover
1986 - GIC introduced Mediclaim insurance
1996 - Differential Premiums introduced by GIC
1999 - Insurance Regulatory and Development Authority (IRDA) Act passed, Private
participation allowed, FDI ceiling marked at 26%
2001 - Indian Insurance Amendment Act, 2001. GIC became re-insurer. IRDA provisions for
TPA (Third Party Administration) in Health Insurance. General Insurance (Public
Sector Companies) Association (GIPSA) formed by merging subsidiaries of GIC.
1.4 Necessity of Health Insurance

As any other insurance product, health insurance can be considered a risk mitigation tool, to
meet any expenses associated with uncertain health conditions in the future. And for any
society or a country it is tool to address the healthcare needs of the whole set of people.

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The primary purpose of health insurance is to protect people from the financial risks of
illness by enabling people to incur healthcare costs without worrying too much about the
financial consequences. In other words, insurance allows patients to focus on solving the
health problem rather than paying for it. It minimizes the uncertainty of both the timing of
treatment and the cost of treatment.




1.5 Benefits of Health Insurance

The following are the benefits offered under health insurance:
i. Medical Expense Cover: Basic hospitalization expenses are reimbursed. It covers
payment of expenses related to hospitalization and the services rendered by the
doctor and the nursing home. In the US context medical insurance is popularly
covered through Blue Cross and Blue Shield insurance schemes. These medical
schemes take care of the medical expenses. The main benefit under these insurance
schemes is that a pre-determined number of days stay in the hospital and hospital
costs are covered under the scheme. Apart from these costs, all other costs for
services provided by the hospital are covered while the insured remains to be
hospitalized. Blue shield plans, pay to the doctor/hospital on behalf of the insured.
In some cases the balance of the expenses are to be borne by the insured himself.
ii. Major Medical Expense Cover/Long-term Care Insurance: It covers expenses
related to major surgery or operations, due to serious illness or disease. Major
medical coverage continues protection after basic medical expense insurance
benefits have exhausted. The major medical insurance policies may add benefits for
some services not covered by the medical expense insurance policies. A high
deductible is applied to major medical insurance. The insured must pay an amount
of medical bills equal to the deductible, so that the insurer will pay the expenses in
excess of the deductible.
iii. Disability Income Cover: This policy is primarily aimed at indemnifying the lost
income during the disability period/treatment period. It tries to replace the income
that cannot be earned due to sickness of the assured. The benefit is usually paid as a
percentage of the capital sum insured, and is paid weekly. It is basically an indirect
A person asked God, What surprises you most about mankind?
God answered, They lose their health to make money and then money to restore their
health.
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protection to the insured. The period for such compensation can either be
short/long.
iv. Pre & Post Hospitalization Expenses: Many companies allow these expenses. The
permitted number of days differs from company to company.
v. Transportation Charges to the Hospital (Ambulance Charges): Some insurers
schemes provide for reimbursements.
vi. Extent of Cover: A majority of schemes are operational throughout the country.
Some schemes are operational in selected hospitals only.
vii. Domiciliary Treatment Charges: Generally, allowed for a stipulated minimum
number of days. Subject to acceptable proof that such treatment was required.
viii. Cashless Hospitalization Treatment: Majority of insurers are now offering this
facility by the way of TPAs (Third Party Administrators).
ix. Donor Expenses: All hospitalization expenses incurred by the donor in case of
major organ transplant are covered in certain insurance policies





1.6 Additional Benefits of Health Insurance

Apart from providing protection to the insured, health insurance provides benefits as a
long-term savings tool and reduces undue mental tension at the time of critical illness or
disability. Following are the additional benefits of health insurance:
i. Savings Tool: People may prefer to save in various saving instruments than buying
a health policy. But these savings involve a lot of time and may not be available at
short notice and at the time of need. A saving program will yield very little in the
beginning, while an insurance policy guarantees the full value and also various
benefits mentioned in the policy at any point of time during the tenure of contract.
Thus, if a person is unable to save sufficient amount in the early stages of his life, he
should at least obtain a health insurance policy to meet any contingency related to
his health/disability.
A 2008, Mckinsey Report states that, 40% of medical travelers seek advanced technology,
while 32% seek better healthcare. Another 15% seek faster medical services while only 9%
of travelers seek lower costs as their primary consideration
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ii. Safe and Beneficial Instrument: A health insurance policy can be used as an
accumulation plan. In addition to this, tax benefits are also available on the health
policies, which increase its attractiveness as a saving tool.
iii. Minimizes Worry: A health policyholder need not worry about the medical
expenses incurred or loss of income in case of disability. The health policy takes care
of all this and thus reduces undue tension on the part of the individual and his
family.
iv. Promotes Thrift: Health insurance policy may also lead to compulsory savings, if it
is in the form of cash value policy. In a cash value policy, if the policyholder didnt
make any claims earlier, the whole sum insured is paid back. Thus, it leads to
accumulation of savings through health insurance.
1.7 Rising Healthcare costs a driver for transition to Health Insurance

Following are the key factors that contribute to the rise in healthcare expenditure:-
Rising Personal Income: Economists agree that rising personal income leads to
higher spending on healthcare. Because healthcare is a desired service, people
naturally demand more of it as their income rises; other things being equal, rising
income will lead to an increase in the quantity of healthcare demanded and
therefore higher total spending.
Defensive Medicine and Supplier-Induced Demand: "Defensive medicine" refers
to services that have little or no clinical value but that physicians order or perform at
least partly to avoid lawsuits.
Advances in Medical Technology: Medical technology saves lives, decreases pain,
enhances lifestyles, increases function and improves health. Advances in medical
science during the past several decades have greatly increased the set of available
medical services, allowing practitioners to treat patients in ways that were not
previously possible. Most health policy analysts agree that the long-term increase in
healthcare spending is principally the result of the healthcare systems
incorporation of these new services into clinical practice
Taxation: Various governments are trying to impose newer set of taxes which are
further going to add up to healthcare costs.
Demographics: This holds good for nations like US and UK, where there is an aging
population, who are naturally prone to frequent medication and hospitalization.
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Overtreatment: The one thing almost everyone can agree on is that overtreatment
is one of the primary causes of increasing healthcare costs, and many factors
contribute to overtreatment:
Quantity over Quality: Americas fee-for-service payment system rewards
doctors for the number of patients they see and the number of treatments they
prescribe, rather than the quality of care they provide.
Medical Malpractice: Healthcare providers in order to increase the billing to the
insurer try to increase the quantity of services by providing even unnecessary
services.
Consumer Choice: Too many people see doctors when theyre not ill and insist
on tests or treatments they dont need. Experts say almost 25 percent of the
doctor visits are nothing more than social calls and nearly half of all emergency
room visits are for medical care that could have been received during a regular
doctor appointment.
Stringent Regulations on Pharmaceutical companies: With the intervention of
regulators and NGOs (Non-Governmental Organisations) in the clinical trial policies
of Pharmaceutical companies, the cost of R&D in rolling out a drug has risen,
leading to a burden on the cost of medicine being sold.
Prescription Drugs: Usually prescription drugs are costly when compared to
generic drugs. And the use of prescription drugs has increased leading to a higher
expenditure on healthcare
Preventable Illnesses: Another big factor in soaring medical expenses is the cost of
caring for patients who are chronically ill.










Of the $2.3 trillion that Americans spent on healthcare in 2007, somewhere between $500
billion and $700 billion was spent on tests, treatments and hospital stays that did nothing to
improve their health.
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1.8 Comparative analysis of Healthcare spending
Table 1 Healthcare spending across nations
Country Brazil China India Japan USA UK

Year 2009 2009 2009 2009 2009 2009

Total expenditure on health as a
percentage of gross domestic
product


9.0 4.6 4.2 8.3 16.2 9.3

General government expenditure
on health as a percentage of total
expenditure on health

45.7 50.1 32.8 80.0 48.6 83.6

Private expenditure on health as a
percentage of total expenditure
on health

54.3 49.9 67.2 18.5 51.4 16.4

General government expenditure
on health as a percentage of total
government expenditure

6.1 10.3 4.1 17.9 18.7 15.1


Social security expenditure on
health as a percentage of general
government expenditure on
health

0 66.3 15.9 81.5 28.3 0

Out-of-pocket expenditure as a
percentage of private expenditure
on health

57.1 82.6 74.4 80.6 24.2 63.7

Private prepaid plans as a
percentage of private expenditure
on health
41.2 6.2 2.3 13.8 69.3 6.7

Source: WHO Statistics

Interpretation:
From the above mentioned tabular of statistical data on spending on healthcare by various
countries, following are the extracts:-
USA has got the highest healthcare spending to GDP ratio of all.
In Japan, government bears the major share on the healthcare expenditure.
Most of the healthcare expenditure is borne by Individuals and private Insurers
China and India are the countries which have got least health insurance penetration
and in a country like USA health insurance penetration is highest.
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1.9 Public Health and Aging
Decline in fertility and an increase in the average life-span have lead to an increase in the
median age of the worlds population. The growing number of older adults increases
demands on the public health system and on medical and social services. Chronic diseases,
which affect older adults disproportionately, contribute to disability; diminish quality of life
and increased healthcare and long-term-care costs.
1.10 Inherent Problems in Health Insurance Markets
Health insurance is complex and there are serious market-failure problems. Because of
various demand and supply side imperfections, there are a lot of concerns in the health
insurance markets. Important constraints to insurance contracts are:
Moral hazard
Adverse selection
Covariate risks
Information problems
1.10.1 Moral hazard

It arises because policyholders would like to take decisions and actions which maximize
their own benefit and do not want to bear the full cost. Unregulated healthcare markets and
private insurance encourage this behaviour since insurance lowers or avoids the cost of
treatment at the point of treatment:
Consumers tend to demand more (consumer moral hazard).
Providers have an incentive to render more or unnecessary care that might be
medically appropriate (provider induced moral hazard).
To combat this problem, most insurance companies use mechanisms and conditionalities
which in the end only create a burden on policyholders with respect to cost. Some of the
mechanisms which insurance companies have adopted are co-payments or co-insurance,
deductibles, or a reduced premium bonus for the future.
1.10.2 Adverse selection

Adverse selection arises when persons belonging to high-risk groups seek coverage and the
insurer cannot identify the risk. All the policyholders are required to pay the same premium,
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whereas those belonging to high-risk groups are likely to consume more than the average
quantity of services; who finds the insurance policy more attractive and those with good
health will find insurance premium to be too high. Hence very few low-risk people will enrol
in insurance scheme and, as a result, the insurer finds a pool of more risk cases.
1.10.3 Covariate risks

The basic objective of any insurance mechanism is to protect individuals from risk. In most
situations, the insurer helps in protecting policyholders from unique health risks and it is
expected that these risks are not related to others in the insurance pool. However, if
covariate or collective risks cause damage to a lot of members or even to all the members of
pool at the same time, there is nothing to be gained by co-operation. If all policyholders
face similar risks, risks cannot be reduced much by having insurance.
1.10.4 Information problem

Availability of information would have significant bearing on the development of insurance
contracts. The severity of a moral hazard problem and adverse selection problems will
depend on differences in availability of information between the insurer and policyholders.
In order to address this problem insurance companies need significant investments in
infrastructure and development of systems.

Hence these risks and their impacts on different stakeholders are summarized in the
following tabulation:

Insurance settings
Risks and concerns Govt Market Member
Moral hazard -- + ++
Adverse selection +++ -- -
Covariate risks +++ ++ +/-
Cost efficiency -- ++ +/-
Quality - +++ +/-
Equity of access ++ --- ++

+++ strong comparative advantage / (---) strong disadvantage
Govt: universal insurance run by government
Market: private voluntary insurance
Member: insurance systems run by member-based organisations
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Summary
Health Insurance can be defined as any form of insurance whose payment is
contingent on the insured incurring additional expenses or losing income because of
incapacity or loss of good health
Health insurance is based on the principle that what is highly unpredictable to an
individual is predictable to a group of individuals.
Health insurance concept was pioneered by Hugh the Elder Chamberlen from the
Peter Chamberlen family in 1694
In the year 1850, Franklin Health Assurance Company of Massachusetts started
providing accident insurance, to cover injuries related to railroad and steamboat
travel in US
In the year 1911, National Insurance Act was introduced in UK
In the year 1912, Insurance Act was passed to regulate Insurance Industry in India
The primary purpose of health insurance is to protect people from the financial risks
of illness by enabling people to incur healthcare costs without worrying too much
about the financial consequences.
Health insurance provides cover for the following expenses:
Medical Expense Cover
Major Medical Expense Cover/Long-term Care Insurance
Disability Income Cover
Pre & Post Hospitalization Expenses
Transportation Charges to the Hospital
Extent of Cover
Domiciliary Treatment Charges
Cashless Hospitalization Treatment
Donor Expenses
Additional benefits of health insurance include:
It acts as a Savings Tool
Safe and Beneficial Instrument
Minimizes Worry
Promotes Thrift


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Key factors contributing to the rising healthcare expenses are:
Rising Personal Income
Defensive Medicine and Supplier-Induced Demand
Advances in Medical Technology
Taxation benefits
Demographics of nations
Overtreatment which is because of provider preferences of quantity over
quality, use of medical malpractices and customer preferences
Stringent Regulations on Pharmaceutical companies
Prescription Drugs
Preventable Illnesses
USA has got the highest ratio of healthcare spending with respect to its GDP over
other nations
Inherent problems (risks) in health insurance markets are:
Moral hazard
Adverse selection
Covariate risks
Information problems


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References
K.Sujatha Rao, Financing and Delivery of Health Care Services in India, Commission on
Macroeconomic and Health insurance in India
Jonathan Gruber and Helen Levy, The Evolution of Medical Spending Risk, Journal of
Economic Perspectives-Volume 23, Number 4-Fall 2009, Pages 2548
Bhat Ramesh & Mavlankar Dileep (2000), Health Insurance in India: Opportunities,
Challenges and Concerns, Indian Institute of Management, Ahmedabad.
World Health Organization (2002), World Health Report 2002: Reducing risks, promoting
healthy life, WHO: Geneva.
World Health Organization (2006), Health financing: A strategy for the African Region,
Addis Ababa: World Health Organization.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that maybe appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.


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