Game changer: Health Finance + Life Insurance
Why not finance for health using life insurance as collateral?
LTD Financing, a deep problem in India
Healthcare financing, especially for Life-Threatening Diseases (LTD) is a beast of a problem in India. My father was a pharmacist at a Cancer cure hospital. The hospital is a trust-based, so many people used to get the treatment for free. But then also, many in need would not get free treatment. A lot of patients used to come to our house for help as my father had a good relationship with doctors/Medical Retailers and he could ask the doctors/medical companies to help in whatever way possible (yes, the actual medicine cost in India is very low and can be reduced if asked to MR/Doctor). Seeing these cases from childhood, I realized the lack of money and options to finance healthcare in India, especially at the tertiary level and for treatment of Life-Threatening Diseases (LTD). I saw families go bankrupt in the treatment of their loved ones and that seemed highly unfair to me. This piece is just a thought experiment/financial product to increase the options for healthcare expenditure. Hopefully, it starts a chain of thought to solve the issues.
The problem that I am describing here has been widely known. In India, health insurance penetration is very low. According to NSS Survey on Health expenditures done in 2017, about 14% of the rural population and 19% of the urban population had health expenditure coverage. Rural households primarily depended on their ‘household income/savings’ (80%) and on ‘borrowings’ (13%) for financing expenditure on hospitalisation. Dependence of the urban households on their ‘income/savings’ was slightly more (84%) for financing expenditure on hospitalisation, than on ‘borrowings’ (about 9%). About 55 million Indians were pushed into poverty in a single year due to the patient- care costs, as per a study by the Public Health Foundation of India. All these numbers represent the dire situation of healthcare expenditure in India. COVID-19 has exposed it even further with many households losing their livelihood and COVID-19 being added as another common LTD.
Quoting Tribunal:
Earlier, medical debt was a narrative of the American patient-care, but now developing countries like India are deeply immersed into it. One of the major reasons why India’s poor incur debt is the cost of healthcare, which has risen disproportionate to incomes. Another is wasting lifetime earnings or selling assets to pay for end-of-life situations, where chances of survival are minimal. Less than 15 per cent of the population in India today has any kind of healthcare cover, be it community insurance, employers’ expenditure and social insurance etc.
According to research by IIPS Mumbai, as seen in the image below, OOPE(Out-of-pocket-Expenditures) still contribute towards the majority of financing for LTDs like Cancer, Heart Diseases. About 28% of the households incurred CHE(catastrophic health expenditure) and faced distress financing. Among all the diseases, cancer caused the highest CHE (79%) and distress financing (43%). More than one-third of the inpatients reported distressed financing for heart diseases, neurological disorders, genitourinary problems, musculoskeletal diseases, gastrointestinal problems and injuries.
Business Opportunity
The above numbers prove that this is a need of the hour in India. But the needle doesn’t move till there seems to be a decent business opportunity. According to an article published by Ken on Healthcare financing, 65% of health expenditure in India is paid for by the patients – estimated at ₹ 3,20,000 crore ($40.5 billion). So the market size is huge and requires some innovative financial product to bridge the gap of healthcare financing. Right now, the healthcare loans market is 20% non-electives and 80% electives, but non-electives are expected to mushroom to 80% of the healthcare loan market, according to the founder of a healthcare lending startup. Since the ticket size for tertiary care is a lot larger than small-ticket elective procedures. Electives would largely remain in the ₹ 1-2 lakh ($1,403-$2,807) range, while the price of non-elective procedures could be up to ten times of elective procedures.
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Current Solutions
There are quite a few companies in India which are into healthcare financing. But the major players like Bajaj Finance have restricted themselves to financing for elective healthcare (governed by consumer choice—such as cosmetic surgeries, hair transplants, dental care, etc.) The electives are mostly done by comparatively wealthier segment and are not done in a crunch, which means that the risk of defaults is on the much lower side. The reasons are evident, quoting the Ken article:
There is another risk involved with non-electives—the default rate for electives, currently controlled at below 1%, may go up, said the former senior executive with Bajaj. The risk is higher when the hospital is unable to guarantee patient survival after a non-elective or emergency surgery. If the patient is unhappy with the outcome of a non-elective procedure, the probability of her defaulting on the loan increases.
Besides, the expansion from elective to non-elective procedures is bound to increase the risk of defaults. More so if the person who got the emergency procedure didn’t make it or didn’t recover. The former senior executive with Bajaj says that with non-electives, the need for loans is borne of desperation not discretion. The higher need, he says, is at the bottom of the pyramid, where repaying capacity is low. If you are selective, you can avoid that.
Even other financiers like LetsMD, HealthFin don’t finance if the affected person is the sole earner of the family. Ironically, the person most prone to need of emergency health services in the family is mostly the sole earner as he is the one that goes out, so has the highest chances of accidents and also is the one most exposed to pollution, stress, the causes of major LTD.
Life Insurance as collateral
What if we could take Life/term insurance as collateral to finance for healthcare? There are multiple situations to be considered in this case:
In case of unfortunate death, the life insurance will be claimed and the amount can be collected from the insurance amount.
If the person survives, but is disabled and is unable to work:
If the person is not the sole earner of the family, then the earner of the family should have been the guarantor of the loan and should pay the amount back.
If the person is the sole earner, it needs to be checked if the insurance policy gives partial claims on disability and partial/full amount can be collected from the claimed amount as per agreement. This should be checked beforehand to make sure, that it is the case.
If the person survives and is fit to work, this is the happy case where he can repay the loan.
Also, the good part about life/term insurance is that most of the sole earners of the family do get the same for the security of the family, especially after 90s LIC agents boom.
From the numbers point of view, the insurance penetration (premiums as a percentage of GDP) of life insurance in India was 2.74%, while that of general + health was 0.97%. Total premium submitted for life insurance in 2018-19 was 5,08,132 crores, while that for health was 50,833 crores, making premium for life around 10 times that of health. Given health insurance premiums are higher than life insurance, it can be said that the amount secured and people via life insurance is much higher than via health insurance. This means that there is a big crowd that can be considered as the target group for this product.
Please leave your feedback:
Why has this not been done till now?
This can be true for a variety of reasons, including that it doesn’t make any sense :D. I guess it is due to regulatory hurdles that were present earlier. Viatical/Life Settlements (an arrangement whereby a person with a terminal illness sells their life insurance policy to a third party for less than its mature value, in order to benefit from the proceeds while alive) was made legal in India by an amendment in 2015. So, there seems to be a lag in this becoming mainstream. In USA viatical settlement is a decently big industry. Even though a ton of things happens unofficially, the official numbers according to a report by Magna show that policies worth a total of around 3.5 Billion exchanged hands in 2018-19. For a loan on health finance to be mainstream, a similar approach to viatical would need to be taken where multiple nominees are added to the policy or policy is traded. Hope to see this happen soon.
Conclusion
I feel that there is a huge need and business opportunity for innovation in healthcare expense financing in India. This might not be the final solution and it might even be blatantly wrong (Please comment and share feedback), but the purpose of this post was to open this problem in front of some awesome people reading this and call for more and more minds to pursue a solution. If somebody is interested in brainstorming for a solution, please reach me out at kaavee315@gmail.com. You can also find me on https://twitter.com/KaranVaidya6.
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