Responding to criticism by Muhammad Ali Jinnah that the Congress party was not allowing his party to stay secular, Jawaharlal Nehru said, ?This reminds me of the man who is charged with the murder of his mother and father and begs clemency of the court saying he is an orphan.? Pandit Nehru?s immortal quip about circular logic strongly applies to the operations of the flagship government-run but employer-funded medical insurance programme?the Employees State Insurance Corporation (ESIC). ESIC has not fulfilled its mission of covering a large part of India?s labour force, offering value for money, and keeping clients happy. ESIC blames employers. But the real reason is their monopoly; employers are not clients but hostages. Let?s take a deeper look.
ESIC covers private sector employees with wages of up to R15,000 per month. Employees contribute 1.75% and employers contribute 4.75% of the wages. ESIC contributions grew from R5,749 crore to R7,070 crore between FY11 and FY12. But the benefits paid out in both these years were R2,620 crore and R3,375 crore. This implies a claims ratio?the benefits paid out as a percentage of contribution?of 45% and 47%, respectively. India?s health insurance industry has a claims ratio of 100%, i.e. the amount paid out as benefits equals the contributions. The Obama healthcare reform programme in the US targets a claims ratio of 85%. What is the secret sauce of ESI that the global health insurance industry should learn? Unfortunately nothing; ESIC is a monopoly with no competition. But instead of holding ESIC accountable for their low claims ratio and high employee dissatisfaction, salary coverage limits have been continuously raised to expand their kingdom.
India?s health insurance?served by public and private sector insurance companies?has grown from annual premiums of R300 crore in 2001 to R17,000 crore in 2013. But India still only spends 4% of its GDP on healthcare, out of which only 1% comes from the government. And private healthcare spending?whether out of pocket or through insurers?is expected to grow at 30% every year for the next 10 years because the joint family is breaking down, urbanisation is accelerating, and healthcare costs are going up. This makes it imperative that the policy curates a vibrant, competitive and fair health insurance market.
Today, 30% of India?s formal health insurance premiums are collected by ESIC that are not subject to any competition. This allows them to sustain low claims ratios, run hospitals which often offer poor service, and invest R28,000 crore in government securities and bank deposits for their reserve fund. Of reserve, the non-earmarked/general and contingency reserve was over R18,500 crore. More dangerously, the surplus funds are now being used to set up medical colleges and other projects with investments of R10,000 crore for which it does not have the mandate or capabilities. The businesses of health insurance, running hospitals and medical education are connected but require distinct thought worlds and competencies.
What should we do? ESIC should immediately cut the ESI premium by 30% and keep adjusting it every year to target a claims ratio of 85%. ESIC must reduce its administration and other costs that currently amount to R900 crore per annum. Most importantly, all employers should be given an option to pay their health insurance premiums to public or private sector insurance companies in schemes that offer the same benefit or better benefits?this is already allowed for in the Employees Deposit Linked Insurance (EDLI) component of the Employees Provident Fund Organisation (EPFO). In the first phase, this choice should be offered to employer for bulk purchases but within two years we should set up a health insurance exchange that will allow employees to choose from a pre-approved panel of insurers and schemes.
All these changes need to be accompanied by a fundamental shift in policy thinking around employee benefits for a cost-to-company (CTC) world. In a CTC world, benefits are not over and above salary but come out of it. Raising benefits does not raise gross salary but reduces take-home salary. And raising mandatory payroll confiscation?for a monthly wage of R6,500 it is now above 45%?encourages informal employment because most workers cannot live on half their salary. This is also why the reform of ESIC and EPFO are closely related.
Economist Albert Hirschman wrote a fantastic book in 1970 called ?Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States?. He argued that people have two different ways of responding to disappointment with countries or organisations; voting with their feet (exit) or staying put and complaining (voice). Unfortunately today exit is not an option for employers and employees who pay into EPFO and ESIC. And over the last two decades their voices have not been heard because any labour reform is wrongly positioned as anti-worker. But the monopolies of ESIC and EPFO are overcharging workers and hurting formal job creation. Both have credible and well-regulated substitutes in NPS and health insurance regulated by PFRDA and IRDA, respectively. If the government is not listening to the voice of workers, can the Competition Commission offer them an exit?
The author is chairman, TeamLease Services