No investment option can give peak return at all times. Each financial product has to undergo its natural cycles of crests and troughs; the timing is also important to get the best returns. It can also be said that to get optimal returns, a person should have a heterogeneous mix of investment portfolios. This article superimposes this approach to analyse healthcare financing.
Financing one’s healthcare is similar to investing in a product. A majority of Indians follow the traditional practice of “paying out of pocket” methodology. Statistics say that around 4.5% of the gross domestic product is spent on healthcare “out of pocket” and health insurance penetration is still low. A person is not hesitant to take insurance for his vehicle, but when it comes to health, he is hesitant because of the intangibility, though he knows somewhere that before the age of 70, he will fall ill, at least once, in a way that may require hospitalization and there will be related expenses. Despite this they try other options.
Alternatives people try
• People invest in gold and real estate so that the appreciation in the asset value enables their out-of-pocket spending on healthcare. If a person does not fall sick, he is assumed to be lucky enough from the assets perspective.
• In the joint family system, relatives help out sick people financially.
• Loans borrowed from organized or unorganized sources/sympathy-based donations.
• Subsidized/free treatment at government hospitals, government insurance coverage available to the possible extent.
People are ready to invest in other modes, keeping an eye on healthcare financing, but are not interested in health insurance.
What stops people from buying health insurance
• Cost versus benefit (in general, the investment returns are nil in health insurance).
• Understanding terms and conditions of the policy.
• Fear of spike in premium rates.
• Lack of confidence in getting claims settled.
• There are no guaranteed premium rates for the long term (both individual and group), which makes the customer feel that instead of paying the premium, it’s better to invest in a savings account since there is a guaranteed return.
The case for health insurance
Despite these factors, health insurance is a necessary evil and it is a must for Indian citizens to have it in their portfolio as our lives are falling in a trap of vicious circle because of the following reasons:
• Life expectancy has increased considerably over the years.
• But the incidence of diseases has also increased.
• Despite the increase in the incidence of the diseases, the average lifespan is increasing because of advancements in the field of healthcare.
• The advancement in healthcare comes with the premium cost to end-consumers attributed to healthcare budgets, spending, cost involved in the maintenance of the corporatized medical hospital industry, among other factors.
• Across the globe, it is going beyond the reach of an end-consumer to manage healthcare expenses from his own pocket. So the theory of meeting healthcare expenses through other options may not be enough. For example, there is no way, one can determine the cost of a complex surgery after five years. Let us assume that a specific surgery cost goes up by 500%, whereas other investments in gold and real estate rise only by 200%, leaving a gap of 300%. On the other hand, a health insurance policy demands only a small percentage of the sum insured as a premium and can help a person minimize the impact.
Optimizing the portfolio: Any option for healthcare financing has its own field restrictions at any point of time. The best way to pitch for a cover drive for healthcare financing would be to have a mixture of all the options. Health insurance does not guarantee complete indemnification. Nevertheless, in the given economic scenario, it is better to estimate the financial requirement of healthcare and use health insurance as one of the options (instead of the only option) for financing healthcare and keep paying the premiums (as loyalty also counts), keeping alternative investments as a standby. But health insurance should be a mandatory devil in our wallet.
S. Jayaprakash is associate director (enterprise risk management), MetLife India Insurance Co. Ltd. Views are personal.
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