Salvaging the Indian Healthcare system

Mayank Arora

Healthcare is fast becoming the biggest development challenge for India while the states and the national government continue to disagree on the best way to tackle it

Healthcare is fast becoming the biggest development challenge for India while the states and the national government continue to disagree on the best way to tackle it


In 2014, the Indian government spent merely 1.8% of the GDP as health expenditure. What is concerning is that 75% of healthcare expenditure was by way of out of pocket (OOP) expenditure. In fact, Indian households incur more than two-thirds of their OOP expenses on outpatient care primarily for accessing medicines. This is one of the main reasons why a further 7% of the households have fallen below the poverty line and also why 60 to 90 million people are continuously below the poverty line every year.

While India has both public and private health insurance, private insurance is largely restricted to the rich urban strata of society as per the last available NSSO data for 2014. Furthermore, while the public health insurance schemes such as Rashtriya Swasthya Bima Yojana, Central Government Health Scheme and Employers State Insurance Scheme, covering 370 million people, increased hospitalisation, they failed to reduce the health burden for the poor. The coverage for health insurance also varies significantly across states with merely 0.3% and 1.7% of people covered in Uttaranchal and Madhya Pradesh, respectively, as opposed to 62.8% and 39.5% coverage in Andhra Pradesh and Kerala.

So what can we do about healthcare for the poor? To begin with, one should be careful to avoid nexus between private health insurers and the health care providers that exist in the US as that has been the major cause of spiralling health care spending to 18% of America’s GDP. Instead, what India requires is a more coordinated effort between the national and the state government so that health policy is aligned with the needs of the states. This, then, would need to be supplemented with a broader private and community-based insurance coverage.

There are examples all over the world which could provide a direction in which Indian healthcare could be headed. Here, the broader models of Germany, Japan and the Netherlands providing financial protection may benefit India. Adopting such models would entail mandated income-based insurance cover, bringing a wider group into a common risk pool to restrain existing high OOP expenditure, and providing wider access by relying on demographic dividends of a largely young population.

However, the long-term impact of such a policy remains untested for its people. The examples of China and Singapore are important in understanding the mixed model of public and private health insurance. These models rely on the use of Medical Savings Account (MSAs) to enhance efficiency in transmission and ensuring flexibility in administration. In recent times, economists have pointed out about the use of tax-deductible MSAs similar to provident funds that may be implemented in India. This can, in turn, reduce the concerns of information asymmetry and higher costs, otherwise concerned with health care financing through insurances.

That said, it is also crucial to maintain the right balance. Due to information asymmetries, the possibility of excessive pricing by pharma companies over and above the costs for research and clinical trials needs restriction. 70% of OOP expenditure in rural areas and 60% in urban areas is incurred on medicines. Hence, drug pricing is key to controlling health care costs in India. As Marica Angell points out in her book, “The Truth About the Drug Companies”, the US drug companies spend higher amounts of funds on marketing than on research. Any health care policy in India that is not cognizant of these dynamics is likely to see an increase in healthcare costs.

However, in India, we do have measures against unexplained rise in drug prices. To ensure affordability as well as transparency, the price for more than 400 essential drugs is controlled by the National Pharmaceutical Pricing Authority, not unlike many other developing countries. The government needs to make judicious use of existing regulations to ensure that the interests of healthcare providers, health insurance providers as well as of those insured are addressed.

Finally, one must remember that the role of minimum health care for all is key for its complementary benefits in terms of raising education levels, reducing discrimination against women, and more essentially, fulfilling basic human rights. Hence health care could turn out to more than just a subsidy and both the states and the national government would do well to treat this as a fundamental investment in human capital and come together to make healthcare work for the masses.


The author is an Academic Associate at the Indian School of Business, Hyderabad and tweets @mayank0809