Home / Opinion / Online-views /  A national health insurance system

Universal access to high-quality tertiary healthcare services is one of the biggest social policy challenges India faces. It is widely accepted that private providers have to add to and assist public systems in the provision of such services. In this context, global experiences show that some form of insurance is the most cost-effective way to deliver such services.


All successful cost-effective health cover systems across the world have four features. One, health insurance coverage is mandatory for all. Two, all citizens are insured for a basic benefits package. People can buy top-up plans privately, either directly or through employers, to supplement coverage. Three, everyone living in an area and of the same age group, irrespective of their health condition, pay the same premium. Four, those who cannot afford the premiums, are provided support.

Apart from controlling long-term healthcare costs, these principles help leverage the widest possible risk-diversification, keep administration costs low, and deliver affordable care. It is important that any national health insurance scheme for India embrace all these principles. Though RSBY provides a basic plan with a flat premium and also subsidizes the insured, both its service and population coverage is limited. For a start, all the different insurance plans offered by state and central governments to various population categories should be merged into RSBY. Supplemental coverage on the basic plan can be provided, wherever required.

The two critical determinants of healthcare costs are how consumers purchase insurance and how insurers procure drugs and services. A free-market model of buying and selling insurance, like in the US, makes two assumptions. One, it assumes that competition between a number of private and public insurers will lower premiums and ensure service quality. Two, market-determined price-setting for services—doctor consultation, diagnostic tests, treatment procedures and pharmaceuticals—delivers the most efficient outcome.

Unfortunately, there is empirical evidence from across the world that competition hasn’t produced efficient outcomes in healthcare markets. For example, on every conceivable parameter—insurance premiums, cost of services and its growth rate, and health outcomes—the US fails to match the more regulated markets elsewhere.

This should not come as a surprise. There is a large body of academic research, starting with Kenneth Arrow’s seminal half-century-old work, which illustrates that competitive markets do not ensure efficient outcomes in healthcare. They show the sale and purchase of health services are rife with market failures. Therefore, market competition does not keep costs down for the insurers or contain premium growth for consumers. Some form of regulation is needed to achieve these objectives.

There are three basic models of purchasing health insurance. On the one hand are the tax-financed, single-payer systems such as in the UK or Canada, where one public insurance plan intermediates with private and public service providers. At the other extreme is the free-market American model, where consumers purchase health insurance in the market from competing health care plans by paying risk-assessed and market-determined premiums. Both suffer from inefficiencies.

But a majority of West European countries have a standard benefits package plan offered by public and/or private insurers and financed through taxation and/or partially regulated premiums. Citizens are free to purchase this basic plan from any insurer of their choice at a flat premium. Insurers cannot discriminate based on pre-existing conditions nor refuse a citizen. Their profits come not from the basic plan, but supplemental coverage. Taxes and premiums, including government prepayment subsidies, flow into a common pool and the insurers are compensated for higher risk incidence through a publicly managed risk-equalization fund. This would provide choice, and minimize adverse selection and insurer’s screening costs.

Similarly, there are three models of price determination between insurers and service providers. At the two extremes are administrative price fixing by the government, and free-market negotiations between insurers and service providers. The latter, as evidence from the US indicates, suffers from several well-documented distortions and inefficiencies, which contribute significantly to America’s high health-care costs.

A middle ground is the “all-payer" system—as in Canada, Germany, Switzerland and elsewhere—where the associations of health insurers within a region, either with or without government participation, would periodically negotiate with corresponding associations of hospitals, doctors, among others and finalize uniform fee schedules that would then apply to all service providers in that region. Service providers should be reimbursed by insurers through bundled payments, based on treatments, rather than fee-per-service to each provider. This model would lower administration costs, increase market efficiency and align incentives.

RSBY should be re-designed based on the West European models for purchasing insurance and pricing healthcare services. Finally, the success of such managed competition markets depends also on strict monitoring of quality standards and extensive use of information technology to develop and maintain electronic patient records.

Gulzar Natarajan is a civil servant. These are his personal views. Comments are welcome at

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