Health Insurance: Drawing inspiration from chit funds to pool health risks efficiently

Jacob M Health Insurance: Drawing inspiration from chit funds to pool health risks efficiently. Indian Journal of Medical Ethics, [S.l.], v. VIII, n. 3, p. 255, jan. 2023. ISSN 0975-5691. Avaialble at: <>.

Jacob Puliyel

Health Insurance: Drawing inspiration from chit
funds to pool health risks efficiently
Published online first on January 20, 2023. DOI: 10.20529/IJME.
Keywords: out of pocket expenses, catastrophic health
expenditure, Rashtriya Swastha Bhima Yojana, ROSCA, adverse
selection, co payments
The provision of government-funded public health services
in India is grossly inadequate and 48.2% of &ldquo;total health
expenditure&rdquo; for India is paid &ldquo;out of pocket&rdquo; [1]. When the
total health expenditure in a household exceeds 10% of the annual income, it is considered catastrophic health
expenditure (CHE) [2].
It is estimated that 3.3% of Indians are impoverished by CHE
every year [3]. Hence, one can easily understand the allure of
health insurance. Insurance companies pool the risks and
make payments more predictable for individuals.
The problems with health insurance
The cost of insurance is relatively high. In India, for a 40-year-
old healthy individual, insurance cover of Rs 500,000 costs
approximately Rs 13,000/annum [4]. The individual insured
must also reckon with the deductibles and co-pays mentioned
in the small print.
People at greater risk of ill health tend to seek insurance
coverage and this adverse selection inflates the insurance
premiums for everyone. Also, insured people are insensitive to
the cost and value of healthcare [5]. When their policy is about
to expire, people who haven&rsquo;t made any claims are tempted to
recover their expenditure by getting needless investigations
and &ldquo;Executive Health Check-ups&rdquo;. Hospitals often undertake
unnecessary investigations and procedures because a third
party is footing the bills. A World Bank report on state-
sponsored insurance schemes details how even programmes
like the Rashtriya Swasthya Bima Yojana resulted in
&ldquo;unnecessary healthcare&rdquo; in the form of needless surgeries for
removal of the uterus and ovaries and appendectomies [6]. All
these factors contribute to inflating the annual premiums,
which tripled for individuals between 2010 and 2015 [7].
Ultimately, hospitals that charge with impunity and the
insurance companies that build their profit margins into the
premium benefit most from insurance. The health risks of
being subjected to unnecessary procedures are borne by the
insured individual.
Two conclusions follow. There is a real spectre of CHE from
which the public need to be shielded, but health insurance
can do more harm than good, due to its inherent
Chit-fund-inspired risk pooling
The solution to risk-pooling can take inspiration from the Chit
Fund &mdash; the rotating saving and credit association (ROSCA)
scheme that has evolved in India and was legislated under the
Chit Fund Act of 1982 [8]. The scheme requires participants to
contribute periodically to the chit fund, for a duration
depending on the number of investors. The collected amount
is auctioned among group members, every time it is collected.
In the context of health coverage, a group of individuals could
contribute each month an amount equal to the monthly
instalment for a health insurance cover of say Rs 500,000. This
can be accumulated in a joint savings account. Anyone who
falls ill can count on the fund to defray their expenses up to
the limit covered. If a person does not claim for illness, his/her
contributions at the end of the term accrue to them with
interest, as in a savings scheme. This removes the perverse
incentive to make unnecessary health insurance claims. The
person is likely to seek the best cost-benefit options in both
the public and private healthcare sectors, and this enables
market forces and competition to drive down costs and
promote improvements in services.
Need for life insurance
Chit funds are usually drawn to cover expenses in business
or for domestic needs, and the repayment capacity of the
member is not impeded by the activity for which the chit
money is withdrawn. In the case of ill health, there is the risk
that illness may impede the borrower&rsquo;s ability to pay future
subscriptions. There is also the risk of death following the
illness. The scheme must consider this and it may take some
form of unemployment/life insurance for its members.
Employer run scheme
Employers may run such schemes with automatic
deductions being authorised by the employees. This reduces
the risk of a payment default. Employers who pay the group
health insurance premiums of their employees can instead
invest in this scheme. Employees who maintain good health
can be incentivised by being paid a bonus, with the health
insurance money accumulated in their account, when they
leave the establishment. All this can be afforded by the
management at little or no extra cost.
Private health insurance often does more harm than good.
This modest proposal looks to mitigate the risks of CHE
through small self-help groups modelled on the Chit Fund,
which evolved and thrives in India.
Jacob M Puliyel (, Visiting Professor,
International Institute of Health Management Research, New
Delhi 110 075, INDIA
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