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May 2020

Think Tank - The Geneva Association: Health protection gaps in emerging markets

Source: Asia Insurance Review | May 2019

There is a broad consensus that private health insurance is preferable to out-of-pocket spending which can be financially catastrophic for households. With the right regulatory framework, private health insurance can have an important and beneficial effect on the sustainability of health schemes to which individuals, governments and employers contribute. The Geneva Association’s Dr Kai-Uwe Schanz provides some insights.
People in emerging markets have great difficulty funding their healthcare needs, as overall expenditure in healthcare is growing faster than GDP. The share of healthcare expenditure has risen globally over the last two decades from about 8% to almost 10% of aggregate GDP. In emerging markets, higher healthcare costs are driven both by communicable diseases and by lifestyle-related diseases. 
However, in these markets, the global trend of higher healthcare expenditure has not led to increased penetration of private health insurance, which remains insignificant with a 2% share of total healthcare expenditure. 
The research paper ‘Healthcare in Emerging Markets: Exploring the Protection Gaps’ published by The Geneva Association analyses the health protection gap as out-of-pocket spending that is financially stressful for households. Based on assumptions on the relationship between stressful out-of-pocket spending and per capita income, the association estimates the annual health protection gap in emerging markets at about $310bn or approximately 1% of these countries’ aggregate gross domestic product.
Quantifying the gap
Our estimate assumes that 100%, 75% and 50% of out-of-pocket spending in low-income, lower middle-income and upper middle-income countries, respectively, can be considered financially stressful and, therefore, is part of the health protection gap. This approach, however, disregards protection shortfalls as a result of lacking access to or the affordability of health services. 
There is a broad consensus that private (voluntary) health insurance is preferable to out-of-pocket spending, which is the most inequitable and economically inefficient form of funding, with potentially catastrophic financial implications for households. If properly regulated in order to address potential market failures such as adverse selection and moral hazard, private voluntary health insurance can make an important and beneficial contribution to the sustainability, quality, availability and cost-efficiency of health services in a multi-pillar system.
Private sector has a role to play
Policymakers in emerging markets can harness private insurance as a catalyst for a socially-beneficial and economically-efficient transition to pooled pre-funding of healthcare expenses, including public, private and public-private schemes. 
This contribution will become even more attractive to society as the role of private health insurers is shifting. They are evolving from payers of claims and benefits _ as well as underwriting data collectors – to an expanded service proposition as providers of comprehensive healthcare advice and solutions. The structural challenges facing emerging markets’ healthcare systems suggest that PVHI as a meaningful component of future-proof healthcare systems can no longer be ignored.
Funding options
Generally speaking, there are four main healthcare financing systems: 
  1. social insurance, based on tax-like contributions and managed or regulated by governments; 
  2. funding through tax revenues and other government resources; 
  3. private direct payments (out of pocket); and 
  4. private health voluntary insurance (Mehrotra and Delamonica 2005).
These categories are not mutually exclusive as all health systems represent a mixture of various elements. For example, mandatory health insurance requirements can be met through private health insurance, which, in turn, often contains elements of cost sharing such as co-payments or deductibles in order to discourage moral hazard and overuse of medical services.
Ultimately, consumers and employers pay for healthcare, either directly or through taxes. Having said this, the configuration of funding channels has important implications for income and wealth distribution. 
New healthcare propositions in emerging markets
In underpenetrated lower-income countries in particular, healthcare stakeholders are looking at technology to help address some of their biggest challenges, such as prohibitive cost, poor quality of data and services, insufficient access and low awareness.
Advanced analytics and digitalisation have led to a dramatic increase in the amount of data, information and insight available to private health insurers, enabling them to achieve quantum leaps in patient care, especially in emerging markets. 
The rise of electronic healthcare data, in combination with unprecedented computing power and inexpensive data storage, greatly enhances the measurement of treatment outcomes and costs in a timely, accurate and cost-efficient manner. In addition, we are witnessing a surge in patient-generated clinical data, particularly from IoT devices. Digital connectivity is facilitating the sharing of this data between consumers and caregivers. 
In future, insurers will have to offer a customer experience that is commensurate with what policyholders find elsewhere. For health insurers the prompt payment of claims and benefits will remain the necessary condition for staying relevant to customers. 
However, an equally important condition will be to move beyond being a funding channel towards becoming an attractive and flexible risk partner that can contribute to improved health outcomes. As well as risk cover, customers want their loyalty rewarded, and they demand enhanced ease and transparency in their dealings with insurers. Having said this, the most important additional customer requirement is arguably prevention, with insurers offering ways to lessen the impact of calamities that adversely impact the lives of policyholders. 
If this vision of a greatly expanded value proposition comes true, the perception of private health insurers will fundamentally change for the better, positioning them to make a meaningful contribution to narrowing today’s and tomorrow’s health protection gaps.
Private voluntary health insurance
Healthcare expenditure is set to continue outpacing economic growth. In low-income countries cost dynamics are driven by the rapid growth of chronic diseases in addition to traditional communicable diseases, which remain a formidable challenge. At the same time, as the majority of populations live in (remote) rural areas, the expansion of healthcare coverage requires increased spending. In the wealthier emerging countries, a combination of spreading critical illnesses, increasing service expectations of middle-class patients, investments into new devices and technologies and the effects of accelerating ageing are pushing up expenditure. 
In light of the significant differences in quality among emerging market health systems, protection gaps need to be approached from two fundamentally different angles. The first perspective focuses on financially stressful spending in the presence of relatively well-developed medical infrastructures. A second approach, relevant to the majority of emerging countries, is based on the lack of access to and quality of health services as the most important issues, with a more immediate link between protection gaps and health outcomes such as life expectancy at birth. 
From a public policy point of view, private voluntary health insurance can help expedite progress towards governments’ main objective - to mitigate their populations’ vulnerability to (catastrophic) out-of-pocket spending. Given huge informal economies and underdeveloped and inefficient taxation mechanisms in many emerging markets, private voluntary health insurance may be the best possible starting point or backing for any public or semi-public prepayment and risk pooling scheme. As historical experience from Europe suggests, private voluntary health insurance can pave the way for the establishment of fully fledged publicly financed systems at a later stage. 
For customers at the base of the economic pyramid, the small incomes from which premiums must be paid require insurers to come up with highly cost-efficient solutions. In addition, insurers need to cater to remote locations, low levels of education and a general lack of experience with formal institutions. Strategies for effectively overcoming these challenges include a radical simplification of products (including enrolment and claims submission), unconventional distribution channels such as telcos or farmer cooperatives, leveraging digital channels and entering into private-public partnerships such as the joint management of (compulsory) insurance schemes.
Healthcare funding is one of the biggest societal challenges of our time and the insurance industry can play a major role in offering sustainable solutions. A 
Dr Kai-Uwe Schanz is director of the protection gap research programme at The Geneva Association.
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