How successful, effective and equitable is insurance as a state policy? Does it address what it is meant to address in the first place, be it in health or agriculture? How does it handle systemic risk, which is essentially uninsurable? Does it also present a lost opportunity for improving the delivery of the existing system, which in turn would have mitigated or reduced the risk?
Here the attempt will be to analyse social insurance taken by the state, both for agricultural and health cover.
Agriculture
The Pradhan Mantri Fasal Bima Yojna (PMFBY) gives insurance cover to farmers against calamities and crop loss, with an enhanced sum insured to cover the cost of cultivation. The premium paid by the farmer is 2% of the cost insured for kharif, 1.5% for rabi and 5% for horticultural and commercial crops, the rest being subsidised by the Central and state governments in equal proportion.
State governments notify crops for the PMFBY for different areas. It is mandatory for the farmers who take crop loans and is also open for non-loanee farmers. In 2016-17, the overall area covered by the scheme increased by 6.5% to 57.2 million hectares, but the number of farmers went up by 20.4% to 57.2 million, and the sum insured increased by 74% – from Rs 1.15 lakh crore to Rs 2.01 lakh crore. The premium paid increased by nearly 300% to Rs 21,882 crore, of which Rs 4,327.4 crore was the premium paid by farmers. For 2017-18, the gross cropped area under insurance has come down to around 47.5 million hectares, a drop from 30% of gross cropped area in 2016-17 to 24%. The target gross cropped area to be covered is 40%. We are basically back to where we were before the scheme started.
These low numbers, despite the government’s push for insurance, high premium subsidy and higher insurance cover, are a major concern.
In 2016-17, the number of non-loanee farmers was 1.37 crore, against 4.35 crore loanee farmers. But in, reality if we normalise the Maharashtra figures (where in view of a court order, all farmers are being shown as non-loanee farmers), their figure will be less than 10% of total area. Hence, PMFBY is really covering the mandated category of crop loanees, that too mostly irrigated crops.
Catastrophic insurance is most meaningful for small and marginal farmers, and particularly for farmers operating in dry land areas. While NABARD’s crop loan figures show a high percentage of small and marginal farmers, this doesn’t necessarily mean that it is going to the most needy. Suppose 25 acres of land is shown against five adults in a family – this becomes five small farmers, even though the family holding is large. We have a paradox on hand – the farmers who require benefits the most, who are small and marginal farmers with dry cultivable land, are mostly left out, while benefits go to bigger farmers in irrigated areas. Since the premium that the farmer pays is very low and sometimes the state takes up the co-payment obligation, the reason for low penetration needs to be studied to find out whether it is because of the exclusions of tenants and sharecroppers, or because of the crop loan architecture which excludes small and marginal dry land farmers.
For the year 2017-18, insurance coverage area and number of farmers have come down, but the premium has gone up. Like 2016-17, the premium was 12.5% of the sum insured, which was considered high. Premium is a function of transparency, trust, fair claim to damage and timely receipt of premium subsidies by the companies. In many places, the premium is as high as 30-40% of the sum insured because of moral hazard problems.
Poor crop cutting experiments (CCEs) go against transparency and push up the premium, and stymie the long-term growth of the programme. When farmers, in cahoots with state functionaries, select the plot for CCE where the damage is the highest, as has been reported from Karnataka, Rajasthan and Madhya Pradesh, this rising premium trend is a necessary offshoot. In some places, the CCE plot gave a result of one-fourth of average yield, an unacceptable standard deviation. In some major states like Andhra Pradesh, Tamil Nadu, Maharashtra and Karnataka, as well as northeastern states, the state insurance subsidy accounts for 30-40% of the agriculture department’s budget. Any expansion will eat into the department’s budget, further stymieing department’s ability to follow its own priorities. This is possibly the reason why some states are reluctant participants and do not proactively promote insurance.
The Centre’s share of the premium accounted for one-third of the Department of Agriculture and Farmers’ Welfare’s budget in 2016-17. Since the programme covers only a fraction of farmers, this is a problem. When the covered area reaches the targeted 100 million hectares, when tenants and share croppers are also covered, the element of selectivity and strategies of budget balancing will inevitably creep in, which will crowd out the really needy. Paradoxically, risk pooling of a larger number will push out farmers most at risk.
With an increase in CCEs with the village becoming a unit, and data to be provided within one month of harvest by the state, available resources do not seem to be adequate. Delay in the release of state subsidy, delay in computation of claims and insistence on farm-level assessments of local catastrophes exacerbate problems. Insurance companies are not fully prepared and do not have the manpower to handle local calamities and post-harvest damage. This is a classic case of principal agent misalignment, where the insurance companies’ abilities do not match the objective of the state. Social insurance also diverts attention from other features critically required for the sector, such as policies for handling glut and scarcity, flow of institutional finance and investment in the sector to enhance adaptive and mitigative capacity. Systemic risks including price risk still stubbornly continue.
Health
Introduction of the National Health Protection Scheme (NHPS), a catastrophic insurance scheme to cover 10.89 crore households in the latest budget, is another case of social insurance. The coverage is for an amount of Rs 5 lakh per family for secondary and tertiary care. Covered families have no co-payment obligations and the Centre and states take the responsibility of the premium at a 60:40 ratio. The premium is to be arrived at by competition. Regardless of insurance or the trust structure (essentially a healthcare financing agency) that will be followed, the outcomes are fairly known because of prior experience with the Rashtriya Swasthya Bima Yojana and other schemes run by states. The supply side problems will continue, such as expenditure, which has been indicated to be Rs 2,000 crore, but is likely to go up to Rs 10,000 crore and perhaps even beyond that.
Evidence shows that health outcomes are much better where reliable primary medical care is provided. But unfortunately, primary healthcare in the public sector is fraught with problems such as uneven distribution across states, vacancies and the problem of retention and lack of regular presence of medical professionals. Primary medical care is neglected as a subset within primary healthcare, while a whole host of services are provided at primary healthcare centres. Not the least of its problems is chronic under-funding. Adequate funding for primary medical care is the best bet for providing timely medical attention, prevention of disease and managing chronic diseases. Such investments in Brazil, China and Sri Lanka have shown reduced disease burden, longer life expectancy and reduction of hospitalisation and emergencies.
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Primary medical care by providers including PHCs is beneficial for the poor because of the patient-centred approach and likelihood of first contact and continued care. Good primary care has been able to reduce the adverse correlation between income inequality and general health. Shifting to secondary and tertiary medical care by the NHPS for specialist services is not effective, efficient or equitable. Under tertiary and secondary care, out-of-pocket expenses for the poor are said to be higher by one-third, according to studies. There are also differences in provision on care depending on region. The effect of public health insurance on out-of-pocket expenditure for emergency medical care depends strongly on the strength and quality of primary care facilities, which appears to be missing in the present calculus of the NHPS.
The introduction of insurance for secondary and tertiary care without looking at primary care may not protect the poor from impoverishment because of high out-of-pocket expenses, in mostly private sector facilities. The poor also find it difficult to negotiate specialist care hospitals with asymmetrical information. Often, service providers in health knows more than the patient, who probably know only the symptoms or doesn’t know anything at all and gets drawn to free camps. In the absence of regulatory oversight, specialist hospitals maximise their return by pushing up the expenditure unnecessarily. The hospitals also create provider-induced demand by conducting medical camps to match patients and go for premature invasive procedures, converging on the cap figure of Rs 5 lakh.
Other workable optimal solutions are available which tend not to be looked at once the insurance option is explored. One of them is a family health protection plan (prepared by Dr Prasanta Mahapatra and others) to cover ambulatory medical care and hospital access comprehensively at the primary level, which covers everyone with a graded subsidy and tax rebate. Every family gets covered up to Rs 50,000, and all providers of primary medical care such as PHCs, profitable and not-for-profit private providers, general practitioners, nursing homes participate and compete after satisfying the required quality of service standards. This scheme was available with the Ministry of Health and Family Welfare. Universalising an insurance plan not only mitigates the adverse selection problem, it also functions better by incorporating elites within its fold.
It is evident that catastrophic insurance edges out long-term investment by the state and the people. Because of this, it is electorally profitable and politically attractive. But the problem with insurance is you don’t look at other options. While it may absolve politicians from the guilt of not doing much, it divests efforts towards covering systemic risk by glossing over weaknesses of primary medical care, with long-term consequences.
Satya N. Mohanty is former finance secretary, Andhra Pradesh government.