Under new leadership: making the most of India’s private health care system

by Arjun Vasan and Gina Lagomarsino, Results for Development Institute

Just over three months ago, Mr. Narendra Modi was inaugurated as the 14th Prime Minister of India after his party, the Bharatiya Janata Party (BJP), resoundingly defeated the ruling Congress Party. Many observers are now looking to Mr. Modi, a charismatic and controversial former Chief Minister of Gujarat, to see whether and how he will embrace this moment of opportunity at a time of stagnant economic growth, rising inflation, and increasing public frustration with the government, to address India’s tough development challenges – in particular, ensuring the health and financial security of its citizens. India’s health indicators, especially in some states, remain among the worst in the world (e.g., 40% of all children under the age of five suffer from malnutrition). In light of his party’s mandate, and the reshuffling of numerous state governments, Mr. Modi has a ripe opportunity to guide policy that could improve the country’s health care system.

But making progress will be no small challenge. Mr. Modi has inherited a fragmented and highly marketised health sector, in which states exercise significant control over policies and programs, and care – especially primary care – is largely delivered by private providers with minimal government oversight and at a high cost to patients. Although out-of-pocket spending on health care in India has steadily declined over the last decade, it is still high (approximately 60% of total health spending) and risks pushing the poor further into poverty. And while most Indians, even those in poor, rural areas, have access to many different providers, quality is very low. Data from the Medical Advice, Quality and Availability in Rural India (MAQARI) initiative found that in rural parts of Madhya Pradesh, the average village has about 11 different providers, and recent research has shown that only 12% of those providers can correctly diagnose a heart attack, childhood diarrohea, or asthma.

The current structure and development trajectory of India’s health system suggests that the country is at a critical crossroads. If it maintains its current path, India risks making many of the same, hard-to-correct mistakes of other, more developed countries, most notably the United States. But if the new government and other state-level policymakers make good policy choices in the coming years, India has the potential to “leapfrog” some of these challenges and set its health system on a course toward higher quality and affordability.

A fundamental challenge India currently faces is that unregulated growth of private health care could cement a system of uncoordinated and cost-ineffective care. A highly fragmented market, in which different private providers market to the same patients, can sky-rocket overall costs without significantly improving quality. Patients tend to demand curative care more than preventive care, because they are more willing to pay for services when they are sick than before they get sick. And private providers do not have much incentive to focus on prevention, since more sick people increase their revenues. This type of market situation can condition people to believe that more curative care is better, whether multiple medicines and injections for poorer patients, or more tests in up-scale urban hospitals for wealthier ones.

Such a system has led the US to have the highest health care costs in the world, by far, without commensurate health outcomes. But in the U.S., big-data initiatives, such as the Dartmouth Atlas, have demonstrated that some regions of the country have better health outcomes at LOWER costs. In these regions, the private sector dominates as much as anywhere else in the US. The difference is that healthcare delivery is structured better – providers are integrated into coordinated networks that manage the quality of care for individual patients and pay attention to improving health status of key sub-populations, such as diabetics or the frail elderly, that contribute to cost and poor health outcomes.

Some would argue that expanding public sector delivery and curtailing the role of the private sector in India is the best way forward. But the Indian health care system is already so privatised, and the recent election suggests that the populace is not in the mood for expanded government roles. In light of this, we believe there are a few things that Mr. Modi, his new cabinet, and state leaders can do to encourage India’s private health care market to develop in a more positive direction and avoid some of the worst perils.

Extend government health insurance to primary care to influence quality

A key question for Indian policymakers is how to influence the quality and practices of large numbers of small-scale fragmented private providers. A lesson from the US is that carrots work better than sticks. In the US, national and state governments influence the activities of private providers by making government Medicare and Medicaid payments conditional on meeting various standards. In this way, government purchasers not only guarantee more affordable care for key populations, they also can influence the development of the market and the activities of private providers, who are eager to comply so they can qualify for payments.

The national and state governments in India are in a great position to use their purchasing power, not only to ensure financial access for the poor, but also to begin to influence the market. There are already some great platforms for doing so. A nationally sponsored, state-administered insurance program (Rashtriya Swasthya Bima Yojana – RSBY) provides virtually free coverage for services at private and public hospitals to households living below the poverty line. As of April of this year, RSBY has enrolled over 37 million households and has supported over 7 million hospitalisation cases. In addition, a number of states have created separate publicly subsidised health insurance programs to pay for specialised care in private and public hospitals.

These platforms offer tremendous opportunities, and officials should consider whether coverage should extend to include primary care, and whether these insurance platforms could offer coverage to the non-poor, as well as the poor, through tax or premium payments. Extending these government insurance programs could enable the government to influence the types of services that get covered – encouraging more primary and preventive care. They could also increase requirements for quality accreditation and reporting to be eligible for payment. The government’s recent suggestion that RSBY be transferred from the Labour to the Health Ministry suggests that he is already considering ways to leverage this existing platform. At the same time, the government should be cautious in the long term so as to avoid the perils of an overly fragmented financing system, in which different payment programs exist for different segments of the population. This is one lesson the US has learned the hard way, which has led to inequities in pricing, coverage, and quality of care.

Consider innovative payment methods for health care

But government purchasing could have unintended consequences if it is not well-designed. One counter-lesson from the US is that traditional fee-for-service payment mechanisms can lead to perverse incentives that increase utilisation of unnecessary care and out-of control costs. It can also dis-incentivise creative and efficient models for care delivery that rely on information technology or non-physician providers. For example, the fact that most US health providers can only get paid for in-person office visits, has limited the expansion of efficient and convenient interactions via phone, email or video conferencing.

As Mr. Modi considers how to extend health insurance models that incorporate private providers, he could direct his administration to explore innovative payment models in collaboration with state governments that create incentives to provide high-quality, necessary, and efficient care that discourage over-utilisation. The government might even be able to create payment mechanisms that encourage market consolidation and greater coordination across providers. Recent health reforms in the United States have encouraged experimentation with new payment models that pay for entire episodes of care (e.g., care for a diabetic patient over the course of a year), rather than for individual discrete services. This has created incentives for the development of Accountable Care Organizations, which are networks or groups of primary care providers, hospitals, and other types of providers with the capacity to coordinate the entire continuum of care for patients.

These payment models can be complex and not always straightforward to implement, but the Government of India, a large and growing purchaser of care, has the clout to shape how payment systems are designed. It could experiment with various payment mechanisms with an aim to influence the types of services that get provided and their quality.

Launch a national initiative on health information technology strategy and standards

Another way to improve quality and reduce costs, especially in fragmented privatised health systems, is to set up digital health information systems that enable providers to make better decisions at the point of service, share patient records across multiple providers, track patients over time to ensure they get necessary care, and conduct disease surveillance and other research aimed at improving health. Health system managers and policymakers in the US now recognise the power of health data and information technology, but the lack of common standards and a tremendous number of legacy systems that cannot easily “talk” with one another, has made the use of data a big, messy challenge that is only now being surmounted at large costs.

India now has a tremendous opportunity to leapfrog many of these issues and use technology to reduce health care costs and improve patient care. In many respects, India is already ahead of the curve. RSBY has created common standards for its state-administered programs to store and track some information on patient hospital visits – especially innovative for its ability to recognize patients through biometrics and ensure paperless payments to providers. And India is generally known around the world for its innovative IT sector, which could presumably develop even more impressive solutions largely funded by private capital. However, in order to develop systems that meaningfully generate and use health care data, leadership is needed from the government to create standards that ensure the right information is collected (information that can be used to improve quality, not just ensure payment); that it is shared responsibly; used meaningfully by providers; and that systems across providers and payers are interoperable and can “talk” with one another. If India waits much longer, it is likely to face a US style conundrum, where different provider organisations and insurance institutions develop their own information systems based primarily on their own business processes, with no coordinated strategy that takes into account various health information needs and how information will be used and exchanged. Mr. Modi should consider creating a national initiative on health care information to develop such a strategy and create standards, which could be used by private IT companies to develop innovative solutions.

We see our recommendations above as working in tandem and as potential ways forward for the new government to set India’s privatised health care system on a sustainable path that also improves health outcomes. Given the political realities in India, much of this would have to be done in close partnership with state governments, who exercise more control over health care policy in their states. That being said, there is still tremendous potential. For instance, the creation and enforcement of information standards could enable more sophisticated payment models, which could allow government purchasing to be more effective. India’s new government has the opportunity to shape the country’s private market so that the right incentives (e.g., health insurance and payments) and tools (e.g., information exchanges) exist to offer high-quality and coordinated care.

India’s next five-year plan will truly test the collective potential of the country, and there are many reasons to be optimistic that Prime Minister Modi and his party will tap into this. During the election, Mr. Modi and his party ran on a platform of opportunity and economic growth; however, as we have often seen, economic growth in India may not be equitable, and the poor often get sidelined as the rest of a nation moves forward. Economic growth in India should not come at the expense of improving the country’s faltering health indicators, especially when there is tremendous opportunity for the new government to help all Indians reach their full potential.