This is really a juicy one. After going on and on about how wonderful health insurance is, preferably in the private sector, the World Bank -- or at least its research, from which the Bank habitually distances itself -- has now discovered that "it is not immediately obvious that insurance will in practice reduce financial risk." Aha!
So say Adam Wagstaff and Magnus Lindelow in a recent paper about Chinese health insurance. In other words, far from reducing your financial risk, insurance might actually increase it.
Insurance incentivises doctors to take their patients for a ride. It is an old story but the locale is new: China, where costs have increased rapidly because of the continuous introduction of ever-more-costly medical technology in even low-level facilities.
These facilities have "acquired sophisticated medical equipment, and there is evidence the care the system delivers is more costly and more sophisticated than is medically necessary."
The authors conducted three household surveys in China "where providers have until recently largely been paid fee-for-service according to a schedule that encourages the over-provision of high-tech care and the under-provision of basic care, and who are only lightly regulated."
They found that during the 1990s, the Chinese government and labour insurance schemes had increased the financial risk associated with household health care spending.
But -- and here lies the lesson, perhaps -- "the rural co-operative medical scheme significantly reduced financial risk in some areas but increased it in others, though not significantly."
In sum, thanks to private insurance, the Chinese are spending far more on health care than they would otherwise have done. As Amartya Sen has been pointing out, medicines in China cost the earth and are unaffordable by most people.
The authors say that annual spending is "high" if it exceeds 5 per cent of the average income. And it is "catastrophic" if it exceeds 10 per cent of household income.
In China they found "evidence of health insurance increasing the risk of 'high' out-of-pocket expenses, with the marginal effect of the order of 15-20 percent; in the case of 'catastrophic' expenses, it is even larger."
What is amazing is that the Chinese authorities should not have recognised the dangers of the old moral hazard problem inherent in medical insurance. When someone else is paying, never mind for what, things will always cost more to the payer.
In healthcare, since some percentage of the costs has to be borne by the patient, a higher overall bill leads to a higher out-of-pocket expense. If it exceeds 5 per cent, say Wagstaff and Lindelow, as it seems to do in China, the results are "catastrophic" for the household.
The consequence is pretty ghastly, and not very different from India. That's why the CPM should now prod the National Advisory Council to "take action". With health insurance being offered so widely by the hated private sector, the CPM has a chance to break out of its petty bourgeois image. It can move upmarket into the proper bourgeoisie segment by espousing the cause of those who can afford insurance.
But what should that action be? The answer depends on how moral hazard is reduced.
In this context that can only be done by making it unattractive for the clinics to "over-treat". One obvious way is to improve the public health care system. The Indian Railways health system is a good model. It has the best hospitals and employs more doctors than railway officers. In the end, though, the old question remains: who will pay for it all?
Perhaps Mr Chidambaram can perform his magic and come up with a new type of tax on doctors, private hospitals and labs that prevents them from fooling the patient into going for expensive treatments.
Better still, perhaps the insurance companies will come up with the solution, since they have to pay more as well.
*Can Insurance Increase Financial Risk? The Curious Case of Health Insurance in China, World Bank Policy Research Working Paper 3741, October 2005.
