Description
Naveen Midha is the Employee Benefits Practice Leader for Willis India. His career has included senior positions with various insurance entities in and outside India
Benefits & Compensation International
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3
Employee Benefit Trends in India –
challenges and opportunities
Naveen Kumar Midha
Naveen Midha is the Employee Benefits Practice Leader for Willis India. His career has
included senior positions with various insurance entities in and outside India. During his eight
years in the Indian insurance industry, Mr Midha has gained experience in areas of benefits
design consulting and product design and has strategic and operational expertise in
health-care management and other critical areas of employee benefits. In his current role
at Willis, he is responsible for the development and implementation of employee benefit
activities – design, placement, negotiation and servicing on behalf of companies. Mr Midha has a
Bachelor of Business Studies degree from the University of Delhi and is a qualified
Cost and Works Accountant (ICWA), India. He also has an MS degree in
Risk Management from The School of Risk Management, Insurance and Actuarial Science,
St. John’s University, New York, and a Master’s degree in Finance from Delhi University.
India – a much-watched, analysed and observed country
– is standing expectantly on the brink of economic
supremacy and leadership. Before it can realize its vast,
latent economic potential, however, it has to improve
its rapidly expanding but equally challenge-ridden
health-care system. While the impediments in this area
are complex and unique, the opportunities are also
myriad and exciting. On the one hand, we have the multi-
faceted demands and expectations of the mushrooming
middle class coupled with an ageing population, a larger
share of the global disease burden and a severely tested,
not-so-strong health-care delivery mechanism. On the
other hand, India has the fantastic opportunity to learn
from (and, in fact, pre-empt) the challenges that health-
care systems of other developed countries are dealing
with – primarily by incentivizing private-sector
participation in financing and delivery, improving access
and quality and propelling the health insurance sector.
Amidst all these anticipated metamorphoses, we have
Corporate India – with its own set of aspirations and
responsibilities to cater to employees’ concerns. As with
their peers in any other economy, Indian employers are
faced with an increasingly competitive search for skilled
employees, with their diverse expectations and
demographic profile, which has brought about dramatic
changes to human resource management. The growing
complexities in products, ever-changing government
legislation and expanding administrative burdens are
also posing new questions. Added to these challenges is
the spiralling benefits cost resulting in the excessive
financial burden of health care for employers. In short,
organizations in India are being challenged in all aspects
of benefit programmes. No wonder all this decision-
making is proving not to be an easy job for an Indian
employer.
This article explores the employee benefits market in
India and the emerging trends. It details the existing
health-care market and how it has evolved since the
1950s, elaborating on the present drivers of growth.
Finally, it describes the trends associated with the market
(read Corporate India) and how they are expected to
evolve and have an impact over the next few years.
THE EXISTING HEALTH-CARE MARKET
An analysis of the prevailing demographic profile of
India will provide us with a common-sense check of the
existing potential, changing shape and future growth of
the health-care market in India.
The Population and its Health-Care Potential
The current primary driver of growth in the health-care
sector is India’s enormous population. Estimated at
1.15 billion, it is currently the second largest in the
world. It is growing at a rate of 2.2% annually and is
expected to overtake that of China by 2030. By 2050,
the population is projected to reach 1.6 billion.
Importantly, this population includes a middle-income
group of around 385 million people
1
. However, only
15 million are covered by private health insurance,
indicating the massive potential for growth.
In terms of revenues, in 2008 health insurance
premiums amounted to approximately US$450 million
*
as against the estimated potential of US$8 billion. If we
look at the overall health-care market
†
, it is growing at
a brisk 16%, with an estimated market potential of
US$30 billion. However, even at present levels, the
market works out as US$30 per capita and is the
equivalent of only 6% of India’s gross domestic product
(GDP). This further indicates the enormous potential of
the market.
Public–Private Partnership in Health Care
India spends around just 1.5% of its GDP on health-care
funding – and less than a quarter of that sum on
the actual delivery of health-care programmes. It
is therefore of little surprise that in urban health care
nearly 80% of funding comes from the private sector
* £1 = US$1.67; €1 = US$1.49 as at 13 November 2009
†
The health-care market includes retail pharmaceutical,
health-care services, and medical and diagnostic
equipment and supplies.
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and only 20% from the public sector. While the role
of central government is limited to family welfare
and disease control programmes, the state governments
are responsible for primary and secondary medical
care, with a limited role in specialty care. Conversely,
private health-care providers consist of private
practitioners, for-profit hospitals and nursing homes, and
charitable hospitals. Unless there is a decline in the
combined federal and state government deficit, currently
standing at around 8%, the possibility for significantly
enhanced public health spending will be remote
2
.
In addition, as much as 84% of health-care expenses
are funded out of pocket by individuals and
around 16% come from private insurance, which is
predominantly employer funded (see FIGURE 1 below)
3
.
These facts and concerns have been acknowledged in
the National Health Policy. It is indeed unfortunate that,
even today, people in India have to borrow money or
sell assets to fund in-patient care and, as a result, often
defer – or even deny themselves – treatment. As a
result, the expectation of an Indian employee that
his/her employer will provide adequate health-care
coverage is both understandable and justifiable.
Evolution of India’s Benefits System
The evolution of India’s benefits system can be divided
into three distinct phases, as follows:
Phase I (1950s-1970s). This was when policy was based
on two principles, namely that employer–employee
participation for long-term funding is important and
that it is the State’s responsibility to provide health care
and other benefits for the people (especially
government employees and the rural population).
Phase II (1980s-2000). This was when the first
National Health Policy was introduced to encourage
private initiatives in health-care service delivery, while
at the same time widening access to publicly funded
primary health care. This mainly benefited the urban
employee.
Phase III (post 2000). We are now witnessing a further
shift in two important respects, namely the
liberalization of the insurance sector in order to provide
new avenues for health financing and a redefinition of
the role of the State from being only a provider to being
a financier of health services as well (to cover the entire
urban population).
Such a change in focus over the years has been largely
in line with the overall policy framework of moving from
a mass-based approach to a class-based approach, from
monopolistic market conditions to a laissez-faire regime
and from a philosophy of support to a belief in personal
responsibility (see FIGURE 2 opposite).
Other Health-Care Benefit Highlights
Higher Per Capita Demand
India is perhaps the youngest of all nations as it is
home to 20% of the world’s people under 24 years
of age. However, it is ageing. By 2025, an estimated
200 million Indians will be at least 60 years old. This is
triple the number in 2004. Thanks to both greater
affluence and better hygiene, there will be a continuous
improvement in life expectancy (at present 65.4 years)
leading to a further increase in the old-age population.
This large chunk of the growing elderly population will
obviously place an enormous burden on India’s health-
care infrastructure and costs. At the same time, the
decline in the birth-rate (currently standing at 25.4
per 1,000) has led to a decline in the population below
14 years of age. Thus, all these factors have led to
higher per capita demand, especially for old-age health
services.
From a corporate standpoint, there is still no central
health-care programme for senior citizens, which
remains a huge concern for employers.
Lifestyle-Related Diseases
In 2007-08, while the Indian pharmaceutical industry
grew by 8%, the cardiovascular segment recorded a
growth of 15-17% and the diabetes segment, 10-12%.
Communicable diseases have declined while high
severity diseases linked to lifestyle, such as diabetes,
cardiovascular conditions and diseases of the central
nervous system, are on the increase.
Corporatization of Medical Care
Recently, a number of large Indian companies (for
example, Max India, Ranbaxy Laboratories, Escorts,
Wockhardt, Birla, Nicholas Piramal and Dr. Lal’s) have
ventured into health-care delivery and diagnostic
services. However, there is a debate as to whether this
has led to increased professionalism in medical
practices and/or efficiency in the use of hospital
management tools.
Household Expenditure on Private Health Services
The demand for good-quality health care has increased,
with patients preferring to use private health-care
facilities. The growth in affluence of the Indian middle
class is adding to this demand. In the period 1993/94
FIGURE 1
Public–Private Partnership in
Urban Health Care in India
Sectoral financing
*
0
OOP vs Insurance
†
20
40
60
80
100
%
P
r
o
p
o
r
t
i
o
n
o
f
h
e
a
l
t
h
-
c
a
r
e
f
i
n
a
n
c
i
n
g
Private
sector
Public
sector
Private
insurance
Out of
pocket
expenses
* Public spending in health care is very low – at 19% – and the
National Health Policy has recognized this.
†
More than 84% of health-care spending is through unplanned,
non-contributory spending.
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FIGURE 2 Evolution of India’s Benefits System
Government
employee health
insurance
Urban
employee
basic
medical
insurance
scheme
(individual
mediclaim)
Budgetary
support to rural
medical
infrastructure
Liberalization of
insurance
industry:
expansion of
group medical
plan to
Corporate India
Introduction
of stand-
alone health
insurers to
expand
urban and
rural
schemes
Cover for the
whole urban
population
1950s 1970s 1980s 1990s 2000s 2008 2020
to 2004/05, aggregate household expenditure on
private health services has increased at an annual rate
of 9.5%
4
.
Employers’ New Focus on Productivity and Wellness
Benefit costs have outpaced both revenue growth
and inflation, making employers more prudent and
insisting on employees sharing the cost. Competition
for talent is putting pressure on companies to squeeze
the maximum financial savings out of plan design
without diluting the benefits. Thus, employers have
begun to focus more on productivity and attraction,
retention and engagement through offering greater
involvement and decision-making to employees.
Furthermore, some employers are now showing an
increased interest in wellness – a move from illness
management to wellness management.
Medical Tourism as a Major External Driver
If you do a Google search for “India medical tourism”,
it throws up more than two-and-a-half million results.
The emergence of India as a ‘choice-destination’ for
medical tourism derives from the existence of the
country’s English-speaking and literate medical
personnel, state-of-the-art private hospitals and
sophisticated diagnostic facilities, together with
relatively low costs compared with the spiralling health-
care costs of the developed world or even India’s
neighbouring economies. India’s private hospitals excel
in fields such as transplants, cardiology, joint
replacements, orthopaedic surgery, gastro-enterology
and urology. For a comparative view of surgical costs
between Thailand and India see TABLE 1.
Supply-Side Issues
On the supply front, the quality of administration
and patient safety is still a grave issue. Error rates
continue to be at a high level and the outcomes
inconsistent. While there is greater impetus towards
transparency – both from the consumer and the
legislation – the insurers are still in a bind as they
face resistance in data disclosure and are in need
of protection against provider-network malpractice.
This is further compounded by the limited purchasing
power and somewhat weak decision-making skills of the
consumer.
In summary, when it comes to health care, we find two
Indias: one India is a country that provides high-quality
medical care for upper- and middle-class Indians as well
as medical tourists; and then there is the other India in
which the majority of the population lives – a country
whose inhabitants have limited or no access to health
care.
All this points to an interesting scenario where complex
problems and terrific opportunities co-exist. To iron out
the challenges, no single solution would work; rather, a
variety of tools and solutions will be needed. From an
employer standpoint, although it is possible to score
quickly through cost shifting, vendor selection
management and the jugglery of financing; longer-term
solutions lie in increasing consumerism, wellness,
disease management, new design models and provider
re-engineering. The involvement of both employer and
employee is imperative.
THE CORPORATE BENEFIT LANDSCAPE
At present, India lacks a unified social security
framework and whatever social security is available is
overwhelmingly welfare-orientated without any
planned financial discipline. Furthermore, one of the
other great challenges is that, as each component of
India’s social security system has developed separately,
there is no agency responsible for a system-wide
perspective. Thus, most of the statutory and optional
TABLE 1 A Comparative View of Surgical Costs
between Thailand and India
Bone-marrow transplant
Liver transplant
Open heart surgery
Hip replacement
Knee surgery
Hysterectomy
Gall-bladder removal
Surgery
US$
62,500
75,000
14,250
6,900
7,000
2,012
1,755
Thailand
US$
30,000
40,000
4,400
4,500
4,500
511
555
India
Source: India Brand Equity Foundation (IBEF)
Employer and
employee
statutory
contribution
(EPF)
Defined
benefits
(gratuity)
Rural schemes:
(a) below the
poverty line
(b) labour health
insurance
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corporate benefits (see TABLE 2 above) have evolved
independently.
Interestingly, roughly 15% of the current working
population participates in the compulsory, formal
programmes designed to provide income security
during old age. Moreover, these participants (salaried
employees in the formal private sector and in
government jobs) are among the highest income
earners in India.
In a bid to capture and understand changing employee
benefits design in India, various surveys conducted by
organizations like Watson Wyatt and MetLife have
identified the following recent trends:
? The insured benefit components of the reward
structure (viz. insurable with the insurer) are on the
increase. Specifically, components like hospitalization
cover, personal accident cover and group term life
assurance are increasing while the non-insurable
items like housing loans, car programmes and
personal loans are becoming diluted. The gratuity
(viz. a compulsory retirement benefit) has remained
constant while superannuation has decreased
because of the Fringe Benefit Tax (FBT) which made it
financially unattractive.
? In the industries like IT
*
and pharmaceuticals (which
are deemed to provide superior benefits for
employees), a trend towards a greater emphasis on
insured components has been reinforced. However,
old-economy industries like consumer goods and
cars are still somewhat heavier on the non-insured
benefits side.
? Flexible benefits as a concept is still in its infancy
in India… at least from what the analytics have
depicted. Only 33% of the companies in industries
like consumer products and cars have continued
to offer any significant form of flexi-benefits (which
is, in fact, a combination of cash and benefit
elements). This further decreases to 30% in the IT
sector. In addition, flexible benefits are most
commonly provided at middle-management level
and above (extended to junior-management
employees in certain cases) while some benefit
options, e.g. company accommodation, a car
programme and related benefits, are restricted to
certain levels.
TABLE 2 Statutory and Optional Corporate Benefits
Basic level of social security (including compulsory
pension, medical insurance for government
employees and work-related injury compensation)
Public holidays (eight days)
Other types of legal leave (casual leave, privilege
leave, earned leave, maternity leave, etc.)
Severance and termination benefits, e.g. provident
fund and gratuity
Statutory
Supplementary pension plan (known as superannuation)
Medical plan
Life assurance
Leave encashment
Accidental death and disability insurance
Critical illness insurance
Supplementary housing plan
Training and education assistance
Stock plan
Perquisites
Optional / Employer Sponsored
* information technology
From a qualitative perspective, in a corporate employee
benefit programme, compensation is now being viewed
from a Total Remuneration or Cost to Company (CTC)
basis, where CTC equals:
Base pay
plus statutory and non-statutory benefits
plus perquisites
plus short-term and long-term incentives
Quality of leadership, challenging work, career
advancement and brand are the new elements in the
definition of ‘reward’. ‘Critical few’ is gaining importance
over ‘broad based’ amidst the changing expectations of
employees, who want more cash compensation.
The Fringe Benefit Tax
The Fringe Benefit Tax was introduced in India in the year
2005/06. By definition, the FBT is a tax levied on
perquisites – or fringe benefits – provided by an employer
for his employees, in addition to the cash salary or wages
paid. Such prescribed benefits included entertainment,
festival celebrations, gifts, concessionary tickets, the use
of club facilities, employee welfare, board and lodging in
a hotel, running of cars and Employee Stock Options
(ESOPs) incurred by the employer to reward the
employees.
The rationale for levying a fringe benefit tax on the
employer lies in the built-in complexity of isolating the
‘personal element’ in a benefit where there is collective
enjoyment and attributing this directly to the employee.
This is especially so where the expenditure incurred by
the employer is supposedly for the purpose of the
business but includes, in partial measure, a benefit of a
personal nature – the value of which may be difficult to
truly capture.
To counter this challenge, the perquisites that can be
directly attributed to the employees are taxed in their
hands in accordance with the existing provisions of §17(2)
of the Income-tax Act and subject to the method of
valuation outlined in Rule 3 of the Income-tax rules. In
cases where attribution of the personal benefit poses a
problem or where for some reason it is not feasible to tax
the benefits in the hands of the employee, the FBT is levied
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on the employer on the value of such benefits provided or
deemed to have been provided for the employees.
To update readers on the current status of the FBT, the
Finance Bill (02) 2009 proposes to abolish it from
Assessment Year 2010/11(Financial Year 2009/10) and
subsequent assessment years.
While the abolition of the FBT has been greeted by
employers as a welcome move, it may not be an
unmixed blessing altogether. Implications for employers
are as follows:
? The employer would not have to pick up the
administrative burden of the taxation procedures
prevalent in the area of the FBT.
? The abolition would provide employers with the scope
to restructure employee remuneration, e.g. the
reintroduction of stock options that serve as effective
long-term retention and wealth creation instruments.
? Employers would be encouraged to strengthen
superannuation plans as the third retirement benefit
for their staff.
As the removal of the FBT means that perquisites will be
taxed in the hands of employees, they are likely to pay
more taxes (at the valuation rules that apply to
perquisites).
Since there is scope for restructuring employee
remuneration, taking into account the tax proposals,
there is the possibility that employees may be looking at
higher salaries (depending on the company’s
remuneration philosophy).
Health-Care Cost Components
Against the changing nature of the corporate
health-care landscape, it is imperative to analyse
ballooning health-care costs in India – a sore point for
corporate decision-makers and now a heated topic of
discussion on many an HR forum (see FIGURE 3 above).
As can be observed, while 52% of the private insurance
rupee goes towards medicines, drugs and devices,
physician services and surgery, the administrative costs
are as high as 48% of the total cost. Thus, there is
palpable pressure on companies to rationalize these
costs and find smarter ways of reducing them. These
could provide economic incentives to select less costly
forms of care, a programme for review or contracting
with specific health-care providers.
Even though, at present, India is one of the world’s
lowest cost health-care markets, the recent rise in
health-care costs has been exponential. Medical
expenditure in India is experiencing an 18-24% increase
in health insurance costs, which is four times economic
inflation. In 2008 alone, health-care costs jumped by
20%, this being largely attributed to inflation (5%),
demographic changes (5%) and new lifestyles (10%).
On further analysis, the following factors are the
primary reasons for rising health-care costs in 2008:
? The technological changes and the adverse
movement of the exchange rate have led to an
TABLE 3 Diabetes Rates
Brazil
Canada
China
India
†
Mexico
UK
USA
Country
m
4.5
2.0
20.8
31.7
2.2
1.8
17.7
m
11.3
3.5
42.3
79.4
6.1
2.7
30.3
Cases in
2000
*
%
3
2
2
3
3
1
2
Cases in
2030
*
Increase
2000-30
Annual
growth
Source: WHO and UNICEF
* all data rounded to the nearest 100,000
†
The number of diabetes cases in India is expected to increase dramatically.
%
151
75
103
150
177
50
71
increase in the price of equipment. As a result, some
treatment costs have increased by 28%.
? The increase in population as discussed earlier and,
in particular, the growth in the richer segment of the
population from 28% to 43% has also increased the
treatment rate by 8%. In addition, there has been a
30% increase in average prices. To cite an example,
thanks to rising incomes, today at least 50 million
Indians can afford to buy Western medicines – a
market only 20% smaller than that of the UK. If the
Indian economy continues to grow faster than the
economies of the developed world, and the literacy
rate keeps rising, much of western and southern
India will be middle class by 2020
5
.
? Another factor driving India’s health-care costs is
the interesting change in both infectious and
lifestyle diseases. While certain illnesses, such as
leprosy, tuberculosis, malaria and pneumonia, which
are considered to be low-cost communicable
diseases, are set to decline or even face eradication,
the emergence of high-cost lifestyle diseases like
hypertension, diabetes, cancer, cardiovascular
disease (due to more affluent lifestyles but poor
eating habits, obesity etc.) are on the increase.
For example, the rise in chronic lifestyle-related
diseases like diabetes (see TABLE 3 below) and
Room rent and
boarding
expenses
(30%)
Physician services
(22%)
Medicines,
drugs and
devices
(20%)
Miscellaneous provider
charges
(12%)
Surgery
(10%)
Others
(6%)
7.57
FIGURE 3 Health-Care Cost Components
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tuberculosis (see TABLE 4 above) has led to a 12%
increase in treatment rates and a 17% increase in
prices. Over the next five to 10 years, lifestyle
diseases are expected to grow at a faster rate than
infectious diseases in India, resulting in an increase
in cost per treatment.
? The present scenario of a paucity of supply is
expected to further increase the cost to the
consumer. For instance, India has about a tenth of
the number of physicians (51) compared with the
USA (549) for every 100,000 people.
These are the most important reasons behind the recent
health-care cost inflation.
CHANGING INSURANCE DYNAMICS
The Indian insurance market is undergoing an extremely
sensitive and remarkable transformation – viz.
detariffing – that is fast reshaping the way in which
medical insurance as a benefit is both perceived and
sold in India.
As we all know, the standard categories of insurance
bought by any employer are property insurance, liability
insurance and employee benefits. I will now look at
each of these in turn:
Property insurance. This includes material damage, crime
and breakdown insurance. Importantly, in India, this
category of insurance used to be totally regulated, i.e.
tariffed, the premium prices were determined by the
regulator and insurers could not charge below the
prescribed rates. Compared with global standards, such
tariff premium rates were relatively high (and the profit
margin for the insurers was as high as between 30% and
40%), making it the most popular line of insurance
among carriers.
Liability insurance. The premium under this line of
business has been driven by the rates prevailing in
global reinsurance markets. Thus, locally admitted
Indian insurers do not have much control on the risk
pricing. Low capacity in India for liability insurance
means lower net retentions by the local insurers and,
consequently, lower margins.
Employee benefits. As employee benefits was a
non-tariffed line of business (in pricing as well as
policy design), 100% of the risk was retained by
local insurers. A unique feature here was the
common demand for dependent parents’ inclusion
under the medical plan. Under rising medical costs,
this meant increasing severity of claims. Thus,
historically, the average loss ratio under employee
benefit insurance (specifically group medical insurance)
was well in excess of 100%. The placement of
volatile employee benefits insurance on a stand-
alone basis was therefore naturally an expensive
proposition.
As a result, companies were forced to innovate. They
did so with the extensive use of cross-subsidization,
whereby the placement of the entire portfolio across all
categories of insurance is done with a single
insurer and the expensive medical portfolio (as part
of employee benefits) is therefore mitigated by the
relatively profitable property premium.
TABLE 5 The Top Five Benefit Priorities
Include dependent parents’ coverage in the health
insurance programme
Adequacy of sum insured (family floater, corporate floater
or even company sponsorship) with comprehensive
benefits design (pre-existing conditions, maternity, child
cover, dental, etc.)
Learn about personal health risks and how to control
them
Support at the time of incurring, making and settling
claim(s)
Assistance in obtaining adequate retirement solutions
Employees Employers
Insured benefits primarily to attract, retain and motivate
talent (especially in IT, ITES and finance)
The majority are cost conscious and seek the most
price-competitive deal; willing to transition from
incumbent if the latter’s bid is above market median
Especially concerned about the medical loss / claims
experience and the need for strategic assistance in
reining in without diluting the benefits design too much
Extremely keen on knowing what the peer group is doing
(benchmarking)
Need support in benefits administration (enrolment,
endorsement and claims settlement)
TABLE 4 Tuberculosis Rates
Brazil
Canada
China
India
Mexico
UK
USA
Country
91
4
245
287
45
12
3
Cases per
1,000 people
%
75
81
93
87
84
–
70
Cases cured
under DOTS
*
* Directly Observed Treatment, Short-course – the name given to the
WHO-recommended tuberculosis control strategy combining five
components (government commitment; case detection by sputum
smear microscopy; a standardized treatment regime with directly
observed treatment for at least the first two months; a regular drug
supply; and a standardized recording and reporting system that
allows assessment of treatment results).
NOTE: Tuberculosis remains prevalent in India but is expected to decline.
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Naturally, this system of having tariffs for some risks
and free rates for others leads to distortions in
pricing.
On 1 January 2007, the detariffing of property insurance
was announced. This paved the way to allowing a
complete negotiation of pricing between the insured
and the insurer across all segments. No wonder the
property insurance premium fell straight away (for some
portfolios by as much as 80-90%).
Simultaneously, it also had the following implications:
? Cross-subsidization as a concept began to disappear.
Strategy relying solely on insurance negotiation has
now become potentially more expensive.
? The viability of a group health insurance plan
on a stand-alone basis is being severely tested. A
rate break in medical policies is allowed only if
stringent measures (the curtailment of high-usage
benefits, a restriction on dependent parents’
coverage, the imposition of a claims excess, etc.) are
adopted.
? The average claims ratio in health insurance was
approximately 140% in 2008. The medical premium
rates are therefore likely to go up to a minimum of
30-40% in 2009/10 (on an as-is basis in benefits
design).
? Carriers are becoming increasingly vocal and
employers, mindful of the need to introduce cost
controls in health insurance, are scaling back
‘Cadillac plans’.
? Niche-marketing from carriers is now taking place.
Stand-alone health insurance companies (two are
already active in India) are also becoming
commercially viable.
? There is an increased clamour for action against
rogue hospitals, e.g. the blacklisting by benefits
administrators, in networks that are known to
overcharge and indulge in fraudulent practices.
In a nutshell, it is now widely expected that each line
of insurance (including medical insurance) will have
to run independently and under its own steam and
that HR will also have to carry out thorough due-
diligence on the benefits programme in order to
maintain the quality of benefits with an eye to reducing
loss ratios.
EMPLOYER/EMPLOYEE BENEFIT PRIORITIES
Each country has its own set of priorities when it comes
to benefits. As I observed earlier, India already has a
fairly mature corporate benefits structure in place,
especially in the retirement space where the majority of
the benefits are mandated by the Government. With the
recent liberalization of the Indian insurance industry,
private enterprise will be far more enthusiastic in
product and servicing innovation in line with benefit
priorities. From the feedback of 150 employers in IT,
ITES
*
, FMCG
†
, finance, manufacturing and diversified
sectors collated by my firm in the third quarter of 2008,
we can see the benefit priorities of employers and
employees in India, as shown in TABLE 5 opposite.
FIGURE 4
The Likelihood of Employers Switching to
Defined Contribution Health Plans in India
All companies
0
All small companies
(25-500 employees)
20
40
60
80
100
%
P
e
r
c
e
n
t
a
g
e
o
f
e
m
p
l
o
y
e
r
s
l
i
k
e
l
y
t
o
s
w
i
t
c
h
NOTE: The small companies numbered 105 and the large companies 45.
Company size
All large companies
(500+ employees)
Unlikely Can’t say
Somewhat likely Likely
Source: Willis India Employee Benefit Practice, third quarter of 2008.
The other important, closely related, question hinges
on the “likelihood of employers switching to defined
contribution health plans in India” (see FIGURE 4). The
overall findings of the survey are shown in BOX 1
overleaf.
FINAL THOUGHTS
Yes, the challenges faced by the Indian health-care
segment are daunting. The physical infrastructure is
problematic, public spending in health is below that of
more advanced economies, insurance spread is token
and the private-sector bandwidth has yet to reach out to
the underprivileged. On the bright side, there is a
growing awareness of health risks that is driving
consumerism in health care. The Indian market has the
appetite to:
– develop robust health-care delivery mechanisms,
new medical technologies and treatment and
equipment;
– support trained personnel; and
– foster productive public–private partnerships.
Specific to Corporate India, to rein in health-care costs
the employer has an array of options, ranging
from traditional cost-containment strategies (which are
hard policy measures) to newer, intriguing strategies
* information technology enabled services
†
fast-moving consumer goods
10 Benefits & Compensation International
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•
that revolve around the role of consumers of health care
(viz. education, empowerment, incentivization and the
motivation to influence behaviour to combat illness and
live healthier lifestyles). The Indian employee, armed
with improved disposable income, increased awareness
of health risks and wellness initiatives and with a lower
tolerance for inefficiencies in health-care delivery and
claims processes, is less willing to be short-changed on
the provision of the benefits portfolio from his/her
employer.
Against the backdrop of changing insurance dynamics,
all this has resulted in the re-examination of design and
implementation strategies and the development of new
paradigms that are likely to act as a catalyst on health-
care changes.
In summary, the following actions should be taken by
employers in India:
? Traditional cost-containment measures may provide
temporary respite but real solutions cannot be
short-term cost-shifting tactics.
? Post detariffing, health costs are set to rise
dramatically over the next two to five years.
However, the level of preparedness on the part of
consumers and insurers seems inadequate.
? The risk of doing nothing may be greater.
? There is a need to communicate early and often with
employees on impending changes in benefit
design/delivery.
? An employer needs to provide the tools to ensure
the successful understanding and adoption of new
approaches.
? An effective programme must target consumerism
and be holistic in order to change behaviour.
Emerging plans are a work in progress, but can still
achieve better economic and affordable models, greater
consumer accountability, improved administrative and
communication technology, more self-reliance and
self-service, coupled with a better sense of benefit
value. All this will reduce the escalating health-care cost
trend in India. ?
References
11
‘Union Budget 2009-2010’ and ‘Economic Survey 2008-2009’, Ministry of Finance, Government of India.
12
‘Pre-Election Interim Budget 2009’, Ministry of Finance, Government of India.
13
‘Dark Ages return to plague India’, Asia Times Online, 22 February 2002.
14
‘India: National Expenditure on Health’, World Health Organization – National Health Accounts Series, August 2007.
15
‘Healthcare in India – Emerging market report 2007’, PricewaterhouseCoopers.
BOX 1 Findings
? The majority of employers are keen to know
about the implications of this new concept but
are not willing to experiment with it... as yet.
? A possible solution is to ensure higher
employee accountability/awareness while
witnessing escalating health-care costs and
loss ratios.
? The key to the success of a flexi-plan is the
administration.
www.benecompintl.com
Vi si t our websi t e
doc_560504702.pdf
Naveen Midha is the Employee Benefits Practice Leader for Willis India. His career has included senior positions with various insurance entities in and outside India
Benefits & Compensation International
•
DECEMBER 2009
•
3
Employee Benefit Trends in India –
challenges and opportunities
Naveen Kumar Midha
Naveen Midha is the Employee Benefits Practice Leader for Willis India. His career has
included senior positions with various insurance entities in and outside India. During his eight
years in the Indian insurance industry, Mr Midha has gained experience in areas of benefits
design consulting and product design and has strategic and operational expertise in
health-care management and other critical areas of employee benefits. In his current role
at Willis, he is responsible for the development and implementation of employee benefit
activities – design, placement, negotiation and servicing on behalf of companies. Mr Midha has a
Bachelor of Business Studies degree from the University of Delhi and is a qualified
Cost and Works Accountant (ICWA), India. He also has an MS degree in
Risk Management from The School of Risk Management, Insurance and Actuarial Science,
St. John’s University, New York, and a Master’s degree in Finance from Delhi University.
India – a much-watched, analysed and observed country
– is standing expectantly on the brink of economic
supremacy and leadership. Before it can realize its vast,
latent economic potential, however, it has to improve
its rapidly expanding but equally challenge-ridden
health-care system. While the impediments in this area
are complex and unique, the opportunities are also
myriad and exciting. On the one hand, we have the multi-
faceted demands and expectations of the mushrooming
middle class coupled with an ageing population, a larger
share of the global disease burden and a severely tested,
not-so-strong health-care delivery mechanism. On the
other hand, India has the fantastic opportunity to learn
from (and, in fact, pre-empt) the challenges that health-
care systems of other developed countries are dealing
with – primarily by incentivizing private-sector
participation in financing and delivery, improving access
and quality and propelling the health insurance sector.
Amidst all these anticipated metamorphoses, we have
Corporate India – with its own set of aspirations and
responsibilities to cater to employees’ concerns. As with
their peers in any other economy, Indian employers are
faced with an increasingly competitive search for skilled
employees, with their diverse expectations and
demographic profile, which has brought about dramatic
changes to human resource management. The growing
complexities in products, ever-changing government
legislation and expanding administrative burdens are
also posing new questions. Added to these challenges is
the spiralling benefits cost resulting in the excessive
financial burden of health care for employers. In short,
organizations in India are being challenged in all aspects
of benefit programmes. No wonder all this decision-
making is proving not to be an easy job for an Indian
employer.
This article explores the employee benefits market in
India and the emerging trends. It details the existing
health-care market and how it has evolved since the
1950s, elaborating on the present drivers of growth.
Finally, it describes the trends associated with the market
(read Corporate India) and how they are expected to
evolve and have an impact over the next few years.
THE EXISTING HEALTH-CARE MARKET
An analysis of the prevailing demographic profile of
India will provide us with a common-sense check of the
existing potential, changing shape and future growth of
the health-care market in India.
The Population and its Health-Care Potential
The current primary driver of growth in the health-care
sector is India’s enormous population. Estimated at
1.15 billion, it is currently the second largest in the
world. It is growing at a rate of 2.2% annually and is
expected to overtake that of China by 2030. By 2050,
the population is projected to reach 1.6 billion.
Importantly, this population includes a middle-income
group of around 385 million people
1
. However, only
15 million are covered by private health insurance,
indicating the massive potential for growth.
In terms of revenues, in 2008 health insurance
premiums amounted to approximately US$450 million
*
as against the estimated potential of US$8 billion. If we
look at the overall health-care market
†
, it is growing at
a brisk 16%, with an estimated market potential of
US$30 billion. However, even at present levels, the
market works out as US$30 per capita and is the
equivalent of only 6% of India’s gross domestic product
(GDP). This further indicates the enormous potential of
the market.
Public–Private Partnership in Health Care
India spends around just 1.5% of its GDP on health-care
funding – and less than a quarter of that sum on
the actual delivery of health-care programmes. It
is therefore of little surprise that in urban health care
nearly 80% of funding comes from the private sector
* £1 = US$1.67; €1 = US$1.49 as at 13 November 2009
†
The health-care market includes retail pharmaceutical,
health-care services, and medical and diagnostic
equipment and supplies.
4 Benefits & Compensation International
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•
and only 20% from the public sector. While the role
of central government is limited to family welfare
and disease control programmes, the state governments
are responsible for primary and secondary medical
care, with a limited role in specialty care. Conversely,
private health-care providers consist of private
practitioners, for-profit hospitals and nursing homes, and
charitable hospitals. Unless there is a decline in the
combined federal and state government deficit, currently
standing at around 8%, the possibility for significantly
enhanced public health spending will be remote
2
.
In addition, as much as 84% of health-care expenses
are funded out of pocket by individuals and
around 16% come from private insurance, which is
predominantly employer funded (see FIGURE 1 below)
3
.
These facts and concerns have been acknowledged in
the National Health Policy. It is indeed unfortunate that,
even today, people in India have to borrow money or
sell assets to fund in-patient care and, as a result, often
defer – or even deny themselves – treatment. As a
result, the expectation of an Indian employee that
his/her employer will provide adequate health-care
coverage is both understandable and justifiable.
Evolution of India’s Benefits System
The evolution of India’s benefits system can be divided
into three distinct phases, as follows:
Phase I (1950s-1970s). This was when policy was based
on two principles, namely that employer–employee
participation for long-term funding is important and
that it is the State’s responsibility to provide health care
and other benefits for the people (especially
government employees and the rural population).
Phase II (1980s-2000). This was when the first
National Health Policy was introduced to encourage
private initiatives in health-care service delivery, while
at the same time widening access to publicly funded
primary health care. This mainly benefited the urban
employee.
Phase III (post 2000). We are now witnessing a further
shift in two important respects, namely the
liberalization of the insurance sector in order to provide
new avenues for health financing and a redefinition of
the role of the State from being only a provider to being
a financier of health services as well (to cover the entire
urban population).
Such a change in focus over the years has been largely
in line with the overall policy framework of moving from
a mass-based approach to a class-based approach, from
monopolistic market conditions to a laissez-faire regime
and from a philosophy of support to a belief in personal
responsibility (see FIGURE 2 opposite).
Other Health-Care Benefit Highlights
Higher Per Capita Demand
India is perhaps the youngest of all nations as it is
home to 20% of the world’s people under 24 years
of age. However, it is ageing. By 2025, an estimated
200 million Indians will be at least 60 years old. This is
triple the number in 2004. Thanks to both greater
affluence and better hygiene, there will be a continuous
improvement in life expectancy (at present 65.4 years)
leading to a further increase in the old-age population.
This large chunk of the growing elderly population will
obviously place an enormous burden on India’s health-
care infrastructure and costs. At the same time, the
decline in the birth-rate (currently standing at 25.4
per 1,000) has led to a decline in the population below
14 years of age. Thus, all these factors have led to
higher per capita demand, especially for old-age health
services.
From a corporate standpoint, there is still no central
health-care programme for senior citizens, which
remains a huge concern for employers.
Lifestyle-Related Diseases
In 2007-08, while the Indian pharmaceutical industry
grew by 8%, the cardiovascular segment recorded a
growth of 15-17% and the diabetes segment, 10-12%.
Communicable diseases have declined while high
severity diseases linked to lifestyle, such as diabetes,
cardiovascular conditions and diseases of the central
nervous system, are on the increase.
Corporatization of Medical Care
Recently, a number of large Indian companies (for
example, Max India, Ranbaxy Laboratories, Escorts,
Wockhardt, Birla, Nicholas Piramal and Dr. Lal’s) have
ventured into health-care delivery and diagnostic
services. However, there is a debate as to whether this
has led to increased professionalism in medical
practices and/or efficiency in the use of hospital
management tools.
Household Expenditure on Private Health Services
The demand for good-quality health care has increased,
with patients preferring to use private health-care
facilities. The growth in affluence of the Indian middle
class is adding to this demand. In the period 1993/94
FIGURE 1
Public–Private Partnership in
Urban Health Care in India
Sectoral financing
*
0
OOP vs Insurance
†
20
40
60
80
100
%
P
r
o
p
o
r
t
i
o
n
o
f
h
e
a
l
t
h
-
c
a
r
e
f
i
n
a
n
c
i
n
g
Private
sector
Public
sector
Private
insurance
Out of
expenses
* Public spending in health care is very low – at 19% – and the
National Health Policy has recognized this.
†
More than 84% of health-care spending is through unplanned,
non-contributory spending.
Benefits & Compensation International
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5
FIGURE 2 Evolution of India’s Benefits System
Government
employee health
insurance
Urban
employee
basic
medical
insurance
scheme
(individual
mediclaim)
Budgetary
support to rural
medical
infrastructure
Liberalization of
insurance
industry:
expansion of
group medical
plan to
Corporate India
Introduction
of stand-
alone health
insurers to
expand
urban and
rural
schemes
Cover for the
whole urban
population
1950s 1970s 1980s 1990s 2000s 2008 2020
to 2004/05, aggregate household expenditure on
private health services has increased at an annual rate
of 9.5%
4
.
Employers’ New Focus on Productivity and Wellness
Benefit costs have outpaced both revenue growth
and inflation, making employers more prudent and
insisting on employees sharing the cost. Competition
for talent is putting pressure on companies to squeeze
the maximum financial savings out of plan design
without diluting the benefits. Thus, employers have
begun to focus more on productivity and attraction,
retention and engagement through offering greater
involvement and decision-making to employees.
Furthermore, some employers are now showing an
increased interest in wellness – a move from illness
management to wellness management.
Medical Tourism as a Major External Driver
If you do a Google search for “India medical tourism”,
it throws up more than two-and-a-half million results.
The emergence of India as a ‘choice-destination’ for
medical tourism derives from the existence of the
country’s English-speaking and literate medical
personnel, state-of-the-art private hospitals and
sophisticated diagnostic facilities, together with
relatively low costs compared with the spiralling health-
care costs of the developed world or even India’s
neighbouring economies. India’s private hospitals excel
in fields such as transplants, cardiology, joint
replacements, orthopaedic surgery, gastro-enterology
and urology. For a comparative view of surgical costs
between Thailand and India see TABLE 1.
Supply-Side Issues
On the supply front, the quality of administration
and patient safety is still a grave issue. Error rates
continue to be at a high level and the outcomes
inconsistent. While there is greater impetus towards
transparency – both from the consumer and the
legislation – the insurers are still in a bind as they
face resistance in data disclosure and are in need
of protection against provider-network malpractice.
This is further compounded by the limited purchasing
power and somewhat weak decision-making skills of the
consumer.
In summary, when it comes to health care, we find two
Indias: one India is a country that provides high-quality
medical care for upper- and middle-class Indians as well
as medical tourists; and then there is the other India in
which the majority of the population lives – a country
whose inhabitants have limited or no access to health
care.
All this points to an interesting scenario where complex
problems and terrific opportunities co-exist. To iron out
the challenges, no single solution would work; rather, a
variety of tools and solutions will be needed. From an
employer standpoint, although it is possible to score
quickly through cost shifting, vendor selection
management and the jugglery of financing; longer-term
solutions lie in increasing consumerism, wellness,
disease management, new design models and provider
re-engineering. The involvement of both employer and
employee is imperative.
THE CORPORATE BENEFIT LANDSCAPE
At present, India lacks a unified social security
framework and whatever social security is available is
overwhelmingly welfare-orientated without any
planned financial discipline. Furthermore, one of the
other great challenges is that, as each component of
India’s social security system has developed separately,
there is no agency responsible for a system-wide
perspective. Thus, most of the statutory and optional
TABLE 1 A Comparative View of Surgical Costs
between Thailand and India
Bone-marrow transplant
Liver transplant
Open heart surgery
Hip replacement
Knee surgery
Hysterectomy
Gall-bladder removal
Surgery
US$
62,500
75,000
14,250
6,900
7,000
2,012
1,755
Thailand
US$
30,000
40,000
4,400
4,500
4,500
511
555
India
Source: India Brand Equity Foundation (IBEF)
Employer and
employee
statutory
contribution
(EPF)
Defined
benefits
(gratuity)
Rural schemes:
(a) below the
poverty line
(b) labour health
insurance
6 Benefits & Compensation International
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DECEMBER 2009
•
corporate benefits (see TABLE 2 above) have evolved
independently.
Interestingly, roughly 15% of the current working
population participates in the compulsory, formal
programmes designed to provide income security
during old age. Moreover, these participants (salaried
employees in the formal private sector and in
government jobs) are among the highest income
earners in India.
In a bid to capture and understand changing employee
benefits design in India, various surveys conducted by
organizations like Watson Wyatt and MetLife have
identified the following recent trends:
? The insured benefit components of the reward
structure (viz. insurable with the insurer) are on the
increase. Specifically, components like hospitalization
cover, personal accident cover and group term life
assurance are increasing while the non-insurable
items like housing loans, car programmes and
personal loans are becoming diluted. The gratuity
(viz. a compulsory retirement benefit) has remained
constant while superannuation has decreased
because of the Fringe Benefit Tax (FBT) which made it
financially unattractive.
? In the industries like IT
*
and pharmaceuticals (which
are deemed to provide superior benefits for
employees), a trend towards a greater emphasis on
insured components has been reinforced. However,
old-economy industries like consumer goods and
cars are still somewhat heavier on the non-insured
benefits side.
? Flexible benefits as a concept is still in its infancy
in India… at least from what the analytics have
depicted. Only 33% of the companies in industries
like consumer products and cars have continued
to offer any significant form of flexi-benefits (which
is, in fact, a combination of cash and benefit
elements). This further decreases to 30% in the IT
sector. In addition, flexible benefits are most
commonly provided at middle-management level
and above (extended to junior-management
employees in certain cases) while some benefit
options, e.g. company accommodation, a car
programme and related benefits, are restricted to
certain levels.
TABLE 2 Statutory and Optional Corporate Benefits
Basic level of social security (including compulsory
pension, medical insurance for government
employees and work-related injury compensation)
Public holidays (eight days)
Other types of legal leave (casual leave, privilege
leave, earned leave, maternity leave, etc.)
Severance and termination benefits, e.g. provident
fund and gratuity
Statutory
Supplementary pension plan (known as superannuation)
Medical plan
Life assurance
Leave encashment
Accidental death and disability insurance
Critical illness insurance
Supplementary housing plan
Training and education assistance
Stock plan
Perquisites
Optional / Employer Sponsored
* information technology
From a qualitative perspective, in a corporate employee
benefit programme, compensation is now being viewed
from a Total Remuneration or Cost to Company (CTC)
basis, where CTC equals:
Base pay
plus statutory and non-statutory benefits
plus perquisites
plus short-term and long-term incentives
Quality of leadership, challenging work, career
advancement and brand are the new elements in the
definition of ‘reward’. ‘Critical few’ is gaining importance
over ‘broad based’ amidst the changing expectations of
employees, who want more cash compensation.
The Fringe Benefit Tax
The Fringe Benefit Tax was introduced in India in the year
2005/06. By definition, the FBT is a tax levied on
perquisites – or fringe benefits – provided by an employer
for his employees, in addition to the cash salary or wages
paid. Such prescribed benefits included entertainment,
festival celebrations, gifts, concessionary tickets, the use
of club facilities, employee welfare, board and lodging in
a hotel, running of cars and Employee Stock Options
(ESOPs) incurred by the employer to reward the
employees.
The rationale for levying a fringe benefit tax on the
employer lies in the built-in complexity of isolating the
‘personal element’ in a benefit where there is collective
enjoyment and attributing this directly to the employee.
This is especially so where the expenditure incurred by
the employer is supposedly for the purpose of the
business but includes, in partial measure, a benefit of a
personal nature – the value of which may be difficult to
truly capture.
To counter this challenge, the perquisites that can be
directly attributed to the employees are taxed in their
hands in accordance with the existing provisions of §17(2)
of the Income-tax Act and subject to the method of
valuation outlined in Rule 3 of the Income-tax rules. In
cases where attribution of the personal benefit poses a
problem or where for some reason it is not feasible to tax
the benefits in the hands of the employee, the FBT is levied
Benefits & Compensation International
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7
on the employer on the value of such benefits provided or
deemed to have been provided for the employees.
To update readers on the current status of the FBT, the
Finance Bill (02) 2009 proposes to abolish it from
Assessment Year 2010/11(Financial Year 2009/10) and
subsequent assessment years.
While the abolition of the FBT has been greeted by
employers as a welcome move, it may not be an
unmixed blessing altogether. Implications for employers
are as follows:
? The employer would not have to pick up the
administrative burden of the taxation procedures
prevalent in the area of the FBT.
? The abolition would provide employers with the scope
to restructure employee remuneration, e.g. the
reintroduction of stock options that serve as effective
long-term retention and wealth creation instruments.
? Employers would be encouraged to strengthen
superannuation plans as the third retirement benefit
for their staff.
As the removal of the FBT means that perquisites will be
taxed in the hands of employees, they are likely to pay
more taxes (at the valuation rules that apply to
perquisites).
Since there is scope for restructuring employee
remuneration, taking into account the tax proposals,
there is the possibility that employees may be looking at
higher salaries (depending on the company’s
remuneration philosophy).
Health-Care Cost Components
Against the changing nature of the corporate
health-care landscape, it is imperative to analyse
ballooning health-care costs in India – a sore point for
corporate decision-makers and now a heated topic of
discussion on many an HR forum (see FIGURE 3 above).
As can be observed, while 52% of the private insurance
rupee goes towards medicines, drugs and devices,
physician services and surgery, the administrative costs
are as high as 48% of the total cost. Thus, there is
palpable pressure on companies to rationalize these
costs and find smarter ways of reducing them. These
could provide economic incentives to select less costly
forms of care, a programme for review or contracting
with specific health-care providers.
Even though, at present, India is one of the world’s
lowest cost health-care markets, the recent rise in
health-care costs has been exponential. Medical
expenditure in India is experiencing an 18-24% increase
in health insurance costs, which is four times economic
inflation. In 2008 alone, health-care costs jumped by
20%, this being largely attributed to inflation (5%),
demographic changes (5%) and new lifestyles (10%).
On further analysis, the following factors are the
primary reasons for rising health-care costs in 2008:
? The technological changes and the adverse
movement of the exchange rate have led to an
TABLE 3 Diabetes Rates
Brazil
Canada
China
India
†
Mexico
UK
USA
Country
m
4.5
2.0
20.8
31.7
2.2
1.8
17.7
m
11.3
3.5
42.3
79.4
6.1
2.7
30.3
Cases in
2000
*
%
3
2
2
3
3
1
2
Cases in
2030
*
Increase
2000-30
Annual
growth
Source: WHO and UNICEF
* all data rounded to the nearest 100,000
†
The number of diabetes cases in India is expected to increase dramatically.
%
151
75
103
150
177
50
71
increase in the price of equipment. As a result, some
treatment costs have increased by 28%.
? The increase in population as discussed earlier and,
in particular, the growth in the richer segment of the
population from 28% to 43% has also increased the
treatment rate by 8%. In addition, there has been a
30% increase in average prices. To cite an example,
thanks to rising incomes, today at least 50 million
Indians can afford to buy Western medicines – a
market only 20% smaller than that of the UK. If the
Indian economy continues to grow faster than the
economies of the developed world, and the literacy
rate keeps rising, much of western and southern
India will be middle class by 2020
5
.
? Another factor driving India’s health-care costs is
the interesting change in both infectious and
lifestyle diseases. While certain illnesses, such as
leprosy, tuberculosis, malaria and pneumonia, which
are considered to be low-cost communicable
diseases, are set to decline or even face eradication,
the emergence of high-cost lifestyle diseases like
hypertension, diabetes, cancer, cardiovascular
disease (due to more affluent lifestyles but poor
eating habits, obesity etc.) are on the increase.
For example, the rise in chronic lifestyle-related
diseases like diabetes (see TABLE 3 below) and
Room rent and
boarding
expenses
(30%)
Physician services
(22%)
Medicines,
drugs and
devices
(20%)
Miscellaneous provider
charges
(12%)
Surgery
(10%)
Others
(6%)
7.57
FIGURE 3 Health-Care Cost Components
8 Benefits & Compensation International
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tuberculosis (see TABLE 4 above) has led to a 12%
increase in treatment rates and a 17% increase in
prices. Over the next five to 10 years, lifestyle
diseases are expected to grow at a faster rate than
infectious diseases in India, resulting in an increase
in cost per treatment.
? The present scenario of a paucity of supply is
expected to further increase the cost to the
consumer. For instance, India has about a tenth of
the number of physicians (51) compared with the
USA (549) for every 100,000 people.
These are the most important reasons behind the recent
health-care cost inflation.
CHANGING INSURANCE DYNAMICS
The Indian insurance market is undergoing an extremely
sensitive and remarkable transformation – viz.
detariffing – that is fast reshaping the way in which
medical insurance as a benefit is both perceived and
sold in India.
As we all know, the standard categories of insurance
bought by any employer are property insurance, liability
insurance and employee benefits. I will now look at
each of these in turn:
Property insurance. This includes material damage, crime
and breakdown insurance. Importantly, in India, this
category of insurance used to be totally regulated, i.e.
tariffed, the premium prices were determined by the
regulator and insurers could not charge below the
prescribed rates. Compared with global standards, such
tariff premium rates were relatively high (and the profit
margin for the insurers was as high as between 30% and
40%), making it the most popular line of insurance
among carriers.
Liability insurance. The premium under this line of
business has been driven by the rates prevailing in
global reinsurance markets. Thus, locally admitted
Indian insurers do not have much control on the risk
pricing. Low capacity in India for liability insurance
means lower net retentions by the local insurers and,
consequently, lower margins.
Employee benefits. As employee benefits was a
non-tariffed line of business (in pricing as well as
policy design), 100% of the risk was retained by
local insurers. A unique feature here was the
common demand for dependent parents’ inclusion
under the medical plan. Under rising medical costs,
this meant increasing severity of claims. Thus,
historically, the average loss ratio under employee
benefit insurance (specifically group medical insurance)
was well in excess of 100%. The placement of
volatile employee benefits insurance on a stand-
alone basis was therefore naturally an expensive
proposition.
As a result, companies were forced to innovate. They
did so with the extensive use of cross-subsidization,
whereby the placement of the entire portfolio across all
categories of insurance is done with a single
insurer and the expensive medical portfolio (as part
of employee benefits) is therefore mitigated by the
relatively profitable property premium.
TABLE 5 The Top Five Benefit Priorities
Include dependent parents’ coverage in the health
insurance programme
Adequacy of sum insured (family floater, corporate floater
or even company sponsorship) with comprehensive
benefits design (pre-existing conditions, maternity, child
cover, dental, etc.)
Learn about personal health risks and how to control
them
Support at the time of incurring, making and settling
claim(s)
Assistance in obtaining adequate retirement solutions
Employees Employers
Insured benefits primarily to attract, retain and motivate
talent (especially in IT, ITES and finance)
The majority are cost conscious and seek the most
price-competitive deal; willing to transition from
incumbent if the latter’s bid is above market median
Especially concerned about the medical loss / claims
experience and the need for strategic assistance in
reining in without diluting the benefits design too much
Extremely keen on knowing what the peer group is doing
(benchmarking)
Need support in benefits administration (enrolment,
endorsement and claims settlement)
TABLE 4 Tuberculosis Rates
Brazil
Canada
China
India
Mexico
UK
USA
Country
91
4
245
287
45
12
3
Cases per
1,000 people
%
75
81
93
87
84
–
70
Cases cured
under DOTS
*
* Directly Observed Treatment, Short-course – the name given to the
WHO-recommended tuberculosis control strategy combining five
components (government commitment; case detection by sputum
smear microscopy; a standardized treatment regime with directly
observed treatment for at least the first two months; a regular drug
supply; and a standardized recording and reporting system that
allows assessment of treatment results).
NOTE: Tuberculosis remains prevalent in India but is expected to decline.
Benefits & Compensation International
•
DECEMBER 2009
•
9
Naturally, this system of having tariffs for some risks
and free rates for others leads to distortions in
pricing.
On 1 January 2007, the detariffing of property insurance
was announced. This paved the way to allowing a
complete negotiation of pricing between the insured
and the insurer across all segments. No wonder the
property insurance premium fell straight away (for some
portfolios by as much as 80-90%).
Simultaneously, it also had the following implications:
? Cross-subsidization as a concept began to disappear.
Strategy relying solely on insurance negotiation has
now become potentially more expensive.
? The viability of a group health insurance plan
on a stand-alone basis is being severely tested. A
rate break in medical policies is allowed only if
stringent measures (the curtailment of high-usage
benefits, a restriction on dependent parents’
coverage, the imposition of a claims excess, etc.) are
adopted.
? The average claims ratio in health insurance was
approximately 140% in 2008. The medical premium
rates are therefore likely to go up to a minimum of
30-40% in 2009/10 (on an as-is basis in benefits
design).
? Carriers are becoming increasingly vocal and
employers, mindful of the need to introduce cost
controls in health insurance, are scaling back
‘Cadillac plans’.
? Niche-marketing from carriers is now taking place.
Stand-alone health insurance companies (two are
already active in India) are also becoming
commercially viable.
? There is an increased clamour for action against
rogue hospitals, e.g. the blacklisting by benefits
administrators, in networks that are known to
overcharge and indulge in fraudulent practices.
In a nutshell, it is now widely expected that each line
of insurance (including medical insurance) will have
to run independently and under its own steam and
that HR will also have to carry out thorough due-
diligence on the benefits programme in order to
maintain the quality of benefits with an eye to reducing
loss ratios.
EMPLOYER/EMPLOYEE BENEFIT PRIORITIES
Each country has its own set of priorities when it comes
to benefits. As I observed earlier, India already has a
fairly mature corporate benefits structure in place,
especially in the retirement space where the majority of
the benefits are mandated by the Government. With the
recent liberalization of the Indian insurance industry,
private enterprise will be far more enthusiastic in
product and servicing innovation in line with benefit
priorities. From the feedback of 150 employers in IT,
ITES
*
, FMCG
†
, finance, manufacturing and diversified
sectors collated by my firm in the third quarter of 2008,
we can see the benefit priorities of employers and
employees in India, as shown in TABLE 5 opposite.
FIGURE 4
The Likelihood of Employers Switching to
Defined Contribution Health Plans in India
All companies
0
All small companies
(25-500 employees)
20
40
60
80
100
%
P
e
r
c
e
n
t
a
g
e
o
f
e
m
p
l
o
y
e
r
s
l
i
k
e
l
y
t
o
s
w
i
t
c
h
NOTE: The small companies numbered 105 and the large companies 45.
Company size
All large companies
(500+ employees)
Unlikely Can’t say
Somewhat likely Likely
Source: Willis India Employee Benefit Practice, third quarter of 2008.
The other important, closely related, question hinges
on the “likelihood of employers switching to defined
contribution health plans in India” (see FIGURE 4). The
overall findings of the survey are shown in BOX 1
overleaf.
FINAL THOUGHTS
Yes, the challenges faced by the Indian health-care
segment are daunting. The physical infrastructure is
problematic, public spending in health is below that of
more advanced economies, insurance spread is token
and the private-sector bandwidth has yet to reach out to
the underprivileged. On the bright side, there is a
growing awareness of health risks that is driving
consumerism in health care. The Indian market has the
appetite to:
– develop robust health-care delivery mechanisms,
new medical technologies and treatment and
equipment;
– support trained personnel; and
– foster productive public–private partnerships.
Specific to Corporate India, to rein in health-care costs
the employer has an array of options, ranging
from traditional cost-containment strategies (which are
hard policy measures) to newer, intriguing strategies
* information technology enabled services
†
fast-moving consumer goods
10 Benefits & Compensation International
•
DECEMBER 2009
•
that revolve around the role of consumers of health care
(viz. education, empowerment, incentivization and the
motivation to influence behaviour to combat illness and
live healthier lifestyles). The Indian employee, armed
with improved disposable income, increased awareness
of health risks and wellness initiatives and with a lower
tolerance for inefficiencies in health-care delivery and
claims processes, is less willing to be short-changed on
the provision of the benefits portfolio from his/her
employer.
Against the backdrop of changing insurance dynamics,
all this has resulted in the re-examination of design and
implementation strategies and the development of new
paradigms that are likely to act as a catalyst on health-
care changes.
In summary, the following actions should be taken by
employers in India:
? Traditional cost-containment measures may provide
temporary respite but real solutions cannot be
short-term cost-shifting tactics.
? Post detariffing, health costs are set to rise
dramatically over the next two to five years.
However, the level of preparedness on the part of
consumers and insurers seems inadequate.
? The risk of doing nothing may be greater.
? There is a need to communicate early and often with
employees on impending changes in benefit
design/delivery.
? An employer needs to provide the tools to ensure
the successful understanding and adoption of new
approaches.
? An effective programme must target consumerism
and be holistic in order to change behaviour.
Emerging plans are a work in progress, but can still
achieve better economic and affordable models, greater
consumer accountability, improved administrative and
communication technology, more self-reliance and
self-service, coupled with a better sense of benefit
value. All this will reduce the escalating health-care cost
trend in India. ?
References
11
‘Union Budget 2009-2010’ and ‘Economic Survey 2008-2009’, Ministry of Finance, Government of India.
12
‘Pre-Election Interim Budget 2009’, Ministry of Finance, Government of India.
13
‘Dark Ages return to plague India’, Asia Times Online, 22 February 2002.
14
‘India: National Expenditure on Health’, World Health Organization – National Health Accounts Series, August 2007.
15
‘Healthcare in India – Emerging market report 2007’, PricewaterhouseCoopers.
BOX 1 Findings
? The majority of employers are keen to know
about the implications of this new concept but
are not willing to experiment with it... as yet.
? A possible solution is to ensure higher
employee accountability/awareness while
witnessing escalating health-care costs and
loss ratios.
? The key to the success of a flexi-plan is the
administration.
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