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Reimagining health insurance for India

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The Status Quo

India spends close to USD 120 bn on healthcare each year, of which 80% spend happens on hospitalizations. More than 90% of this spend comes out of pocket. This has left a vast majority of the Indian population with healthcare bills disproportionate to their incomes. Consequently, it is necessary to solve for health financing options – whether it be insurance, healthcare loans, health saving plans, crowdsourcing platforms etc. – to ensure adequate access to healthcare for everyone. 

Globally, health insurance is a major source of health financing. In India, Health Insurance is a USD 6.4bn market growing at 22% CAGR. The life coverage ratio for Indian population is 34%, as compared to 90%+ for the US and 95% for China; 75% of this coverage is driven by Government schemes. While initiatives like Ayushman Bharat have helped increase the number of people under health insurance, we as a nation remain severely under-insured. Health insurance penetration (premium paid / GDP) is at 0.2% compared to ~5% in US; average premium paid per life covered is at USD 13.5 (INR 950) vs ~ USD 3500 in the US, and goes as low as USD 1.5 (INR 110) for the population covered under Government schemes

With increasing awareness and low base penetration numbers, health insurance provides a massive opportunity for technology-driven companies. To identify the reasons behind low penetration and explore the opportunities in health insurance, it’s important to understand the industry and its key challenges.

Understanding Insurance and the key challenges in the Industry 

Insurance is a complex product with multiple stakeholders in the form of Patient aka “The Consumer”, Hospital aka “The (Healthcare) Provider” and Insurance Company aka “The Payer”. An understanding of these stakeholders and their key challenges in the Indian Insurance ecosystem is explored in the following section. But if one were to summarize the overall challenge of the industry, it would be that – Health Insurance in India, as it exists today, doesn’t have the product market fit. 

“Health Insurance in India, as it exists today, doesn’t have the product market fit.”

From the product perspective, the key challenges are as follows:

  • Indian insurance companies don’t have an all-inclusive product. The exclusions make it a complicated product to buy & consume. E.g. here is an excerpt from the policy card of a leading insurance company in India – “Important: Insurance benefit shall become voidable at the option of the company, in the event of any untrue or incorrect statement, misrepresentation, non-description of any material particular in the proposal form/ personal statement, declaration and connected documents, or any material information has been withheld by beneficiary or anyone acting on beneficiary’s behalf to obtain insurance benefit. Please note that any claims arising out of pre-existing illness/ injury/symptoms is excluded from the scope of this policy subject to applicable terms and conditions. Refer to policy wordings for the terms and conditions. All disputes are subject to the jurisdiction of Mumbai High Court only.” Also note that policy wordings are to be accessed either by scouring through their website, via a call centre, or in the form of a 50+ pager prospectus physically sent to your address.
  • Furthermore, uncertainty about what’s covered leads to loss of trust in the consumer – “ye insurance waale fraud hain, jab claim karo to bolte hain not covered” is a typical reaction that we heard from consumers. Claims processing is a huge hassle for the consumer – 80% of customers with cashless claims experience report delays in discharge, and a large section of existing customers are looking for advisory on the claims processing process.
  • Insurance as it exists today is a complicated product. It has low engagement from the customer, making it a hard product to sell, and pushing up distribution costs. 
  • There is a lack of technology infrastructure. The coordination between patients, hospitals and insurance companies primarily runs on pdf/ email/ paper-based processes, which creates trust deficit and process delays. This leads to long payment cycles, overbilling & leaves the system open for fraud, making claims processing a hassle for all stakeholders involved
  • The pricing models used by insurance companies are based on old morbidity tables and have seen little innovation; the product suite is not comprehensive and doesn’t offer personalized choices across the price, care categories etc.

From the market perspective, the key challenges are as follows:

  • Insurance works on the principle of group protection. As humans, we are optimists, which makes it hard for us to spend in the present for a future event which has a low probability of occurrence. Given the high cognitive load of assessing risk and the seemingly bleak future pay-out, it’s always easier to not do anything, which translates into not buying – this trend is evident from the fact that ~91% of the lives covered under Insurance are via government or group policies i.e. insurance provided as an indirect benefit to the consumer. Retail penetration remains low and presents an opportunity for marketing and distribution innovation
  • Due to this lack of understanding /interest, as well as low paying capacity in the retail market, insurance companies have sought to sell insurance to corporate customers, which makes up ~50% of the premium value. Combined with the lack of differentiation in the product/ offering, this has had the side effect of price bids leading to low margins/ high claims ratio – group and government business has more than 100% claims ratio v/s 72% claims ratio of the retail business. 
  • The low penetration of insurance in India limits the negotiation power that insurance companies have with healthcare providers i.e. hospitals. This leads to higher healthcare costs and a necessity to funnel demand to partner hospitals, which ultimately leads to slower network growth of partner hospitals.

These gaps manifest as challenges across the value chain as depicted in Exhibit A.

Despite these gaps, the insurance industry has yet to undergo any fundamental disruption. 

  • Insurance companies by nature are positive cash-flow businesses, and operating losses are more than offset by investment income. Given the recurring income from the base of a young country they are yet to face the consequences of a shifting demographic profile. 
  • Insurance is a push product sold by armies of agents. And despite the increased competition innovation has been slow. 

However, we believe this creates massive opportunities for technology-led players, which is what we will focus on next.

Key opportunities for innovation in Health Insurance

We believe the current state of the health insurance industry makes it ripe for disruption. Initiatives like Ayushman Bharat have brought many new consumers into the fold of insurance – and hence better healthcare – for the first time. These initiatives have increased awareness and understanding around insurance as a product. Having experienced the benefits of insurance for the first time, these consumers form a potential target pool for more – and better – insurance products.

The product and market gaps discussed above, present three key areas of opportunities 

  1. New products which serve different needs across price v/s care bands and offer better engagement
  2. Innovation in marketing and distribution to improve customer experience and reduce distribution costs
  3. Better interface between hospital, consumer and insurance companies.

Technology has great potential to create value across these aspects. Some of the key opportunities we see are discussed below: 

A. New products which serve different needs across price v/s care bands and offer better engagement

A1. New product design | Copay and deductibles

Insurance industry today sells a one size fits all product where consumers across different segments do not have access to a full range of premium prices and risk sharing options. In addition, healthcare as an industry has a fundamental issue with incentive alignment. To illustrate, hospitals get paid when a patient gets a treatment done, which in-turn is paid by the insurance company. Here, incentives of hospitals and insurance companies are at odds. Co-pay and deductibles based products can help provide more pricing flexibility on premiums for customers and solve for the incentive alignment across all stakeholders. 

These options exist in very limited form today and have much scope for innovation. They are also an avenue for creating offerings for different segments of customers. Products can be structured to incentivize you for a healthier lifestyle, help consumers reduce insurance premiums and protect insurance companies from inflated and unnecessary care bills. Here, we feel customer education and awareness are a must, because on one hand co-pay/ deductibles can help you reduce your insurance premium, but they come with the risk of shelling out of your own pocket for part of a large medical bill. 

A2. New product design | Integrated care 

An integrated care business model is a format where the provider offers you a health plan (substituting insurance) with an end to end offering with the promise of primary care, specialists and diagnostics at one place. E.g. Kaiser Permanente in the US. This creates an opportunity for the payer (the insurance provider) to funnel the demand to a focused set of providers (primary care, diagnostics labs, specialists), thus (a) having a higher visibility into the care paths of their customers (the patient) and (b) being a in better position to keep the healthcare costs down – driven by discounts on the back of steerage (patients being directed to specific set of providers) and early intervention because of an integrated primary and secondary care set up.

However, these models come with their own set of challenges e.g. the integrated care model enables a one stop solution and better preventive care by the provider, though limits choice across specialists for the customer.

A3. New product design | Products with better engagement

For a young country like India, engagement with insurance products – which presently primarily focus on hospitalization cases – is low. Since insurance is an annuity product, this results in churn or procrastination to buy / renew. This presents an opportunity to create new products which enable better engagement, thereby ensuring better retention, e.g.

  • Cashless OPD plans: There are limited OPD products in the market today, and even those which exist operate on a reimbursement model. Good OPD products would find much higher usage compared to existing IPD first insurance products, and thus can serve as a great retention tool for insurance companies. Servicing the cashless OPD network has not been economical with existing manual intensive operating processes of hospital and insurance companies. However, smart contract-based policies and technology-driven operations can make this a reality. The risk of forgery and collusion is the other key challenge that would need to be solved for, during the design of this product.
  • Products focused on preventive care: Health insurance companies are ideally more closely aligned with the objective of keeping their customers healthy, more so than hospitals who get paid when you fall sick. But the insurance company today has little influence over the preventive healthcare of its patients. There is an opportunity to create differentiated products which incentivizes healthy customer behaviors like regular exercise, regular diagnostics, and leveraging the data generated to create better care paths and personalized medicine for individual customers over the long run e.g. cash backs against the proof of exercise. These can help create a naturally higher frequency of engagement, and solve for high churn and distribution costs. 

There is an opportunity to create differentiated products which incentivizes healthy customer behaviors like regular exercise, regular diagnostics, and leveraging the data generated to create better care paths and personalized medicine for individual customers over the long run

B. Innovation in marketing and distribution to improve customer experience and reduce distribution costs

B1. Innovation in marketing and distribution | Product digitization & simplification

There is a fundamental need to simplify insurance as a product and make it more consumable. It’s difficult to find a person today who fully understands their health insurance policy. It’s a tedious document full of exclusions and caveats and offers little in terms of practical information, most of which is left to be figured out by calling up your agent / insurance company’s call centre. Details around what you are actually eligible for and decision making around the same often remains under a certain amount of uncertainty. A digitized insurance policy with interactive features which explains itself unambiguously will be a marked improvement from the current state of affairs. The Government has already made a start in the form of the National Insurance Repository – though this is very limited in its current scope. A digital policy can go a long way in unlocking innovations both big and small

  • It will allow for seamless communication across stakeholders, enabling higher transparency and trust
  • It will help automate decision making, resulting in automated approvals and payouts, bringing in benefits akin to Aadhar-based DBT, which saw 300mn accounts being credited with Govt. benefits under the COVID relief package just last month. 

A digital policy can go a long way in unlocking innovations both big and small

Net net, it will improve customer buying experience as well as bring efficiency in claims processing 

B2. Innovation in marketing and distribution | D2C health insurance brand

Health insurance is today primarily sold by corporate agents / brokerage firms (33%), hordes of individual agents (31%), or a direct offline salesforce (34%). Given the complicated nature of the product, these channels leave a lot to be desired – there is lack of long term customer engagement; customer education is not process driven; quota based sales commissions leave the industry open for mis-selling. The biggest loss in this process is the lack of a direct connection with the customer, and the missed opportunity to build a relationship. 

D2C distribution can help create a platform for education and awareness around the insurance products. This provides an opportunity to the customer to understand what insurance works best for them before buying and even understand how it can serve them best while making decisions like treatment eligibility, which hospitals to go to, what care packages to choose from, pre-approvals and claims processing etc. Direct to consumer comes with multiple benefits of better customer targeting, potentially lower cost of distribution, better engagement, faster innovation and personalization basis user data, and improved underwriting as you track customer journeys over time.

Direct to consumer comes with multiple benefits of better customer targeting, potentially lower cost of distribution, better engagement, faster innovation and personalization basis user data, and improved underwriting

C. Better interface between hospitals, consumers and insurance companies

Automated claims processing / Digital TPA 

Currently most insurance companies outsource a majority of their claims processing operations to third party aggregators (TPAs) (more than 70% of the volume of claims settled by Insurance industry were settled via TPA). TPA is a low margin shared services industry which has emerged and existed over the years due to the highly manual intensive nature in which claims management is handled today.  Claims processing is one of the key knots in the insurance industry, with pain points across all stakeholders, as we had discussed earlier in this blog. 

One way to solve these problems is by using a digitized insurance policy where claims can be auto adjudicated based on defined rules, essentially smart contracts. Integration with the hospital information systems for medical and billing data can further help solve the trust issue by simultaneously eliminating the over-billing and haircuts problems, and help in rooting out fraud. While this makes a lot of sense for each stakeholder, given the low margin structure of the TPA industry, and claims processing being a cost head for an insurance company, this business will need to identify revenue pools across multiple stakeholders for it to be viable in the long run. 

We see exciting opportunities in health insurance where technology can be leveraged to unlock significant value. Health insurance in India is at an early stage and is set to grow rapidly offering a multitude of avenues for innovation. If you are an entrepreneur, an aspiring entrepreneur, or just an enthusiast for the Indian healthcare financing ecosystem, would love to meet and exchange notes – please drop me a line at aditi@stellarisvp.com

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