Ayushman Bharat and concepts of insurance
Many states have agreed to launch Ayushman Bharat through a trust model and not the insurance model
Nearly 500 million people or 40% of India’s population will have health insurance as the government gears up to launch Ayushman Bharat, a health policy for the under-privileged. Modalities with respect to its pricing are still being worked out, but the scheme will be financed by the centre and the state governments.
Many states have agreed to launch Ayushman Bharat through a trust model and not the insurance model.
Under the trust model, the premium will not be paid to an insurance company, but will be pooled into a trust. It is this trust that will manage and administer the health scheme and also pay the claims. Under the insurance model, the state will pay premiums to an insurance company just like you do to your health insurer. The onus will be on the insurer to administer and pay the claims.
Both insurance and trust models depend on two basic principles: pooling of risk and law of large number.
Pooling of risk
What are the chances of a theft occurring in the entire neighbourhood at once? Close to zero, but chances that one house gets robbed are much higher. Now imagine the entire neighbourhood gets together and pools money to insure themselves against the common threat of theft. So if one house gets burgled, the pool can compensate for that burglary. This is called pooling of risk. Here, the risk of an event is spread out among all the people facing the risk who are prepared to pay a small sum or premium to get protection from that risk.
Law of large numbers
But pooling of risk is just one part, it’s important for this pool to be large to avoid adverse selection and improve the predictability of a risky event actually taking place to be able to price the product right. This predictability increases as more people join the pool. This is called the law of large numbers. According to this law, the average of the results obtained from a large number of trials will be closer to the expected result. Insurers can predict risk more accurately through this law.
So the larger the sample size, the greater is the predictability for insurance—this also leads to pricing the risk right. This is what Ayushman Bharat model depends on given that it’s meant for 500 million people. Comparatively, till FY17, insurers covered about 100 million people, excluding government cover.
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