Whose health are we insuring?

The new insurance cum savings product proposed by the Insurance Regulatory and Development Authority of India attempts to bundle insurance and investment in a ploy to make investors opt for these plans. Contributions towards this plan will be tax exempt and the money saved can be used for medical care post-retirement.

Now this might sound like a great idea as there is an urgent need to find avenues to fund long-term health care. But the product being proposed appears more advantageous for insurance companies and their agents than the actual subscribers.

So what’s new?

The new Health Savings Accounts (or health savings plan), will be run by health insurers and have a structure akin to traditional endowment plans in life insurance. The premium you pay after deduction of charges including premium for the risk cover and agent commission will go into a kitty. The insurance company will invest this kitty in low risk debt instruments. There will be a three-year lock-in on this account and any request for cancellation of the scheme in the initial three years will not entitle the subscriber to any refund. Agents who sell this plan are likely to be paid a commission of 15 per cent in the first year, 10 per cent in the second, five per cent in the third, fourth and fifth, and then on a 2 per cent trailing commission every year.

There are many problems with this structure. One, investors may not know what portion of their premium will be used towards premium and what towards investments: costs could therefore be high. Two, with savings and insurance bundled into one product, the annual premiums may be quite high. Three, the savings may yield very low, below inflation returns, if they are run like endowment plans.

A much better idea would be to structure these plans like the Health Savings Accounts (HSA) in the US where only individuals who already have a ‘high deductible health insurance cover’ can open this account and draw tax benefits.

A high deductible health cover is a policy where the insured has to pay a portion of the medical bill from own funds. The amount over and above the deductible portion will only be paid by the insurer and the premium is low given that only the policyholder coughs up for a chunk of the medical expense.

The idea is that young people can save on hefty premiums that they would have otherwise paid for a health cover and use it build a kitty that can be used to meet healthcare expenses. The money that an individual deposits in the HSA gets invested and multiplies over years. And, unlike the proposal here to keep the health savings account money in debt instruments, in the US, the money in HSAs can be put in all investments approved for retirement accounts — from stocks to real estate. Further, there is no mandate that these accounts have to be bought from insurers. It can be bought from banks, fund houses or HSA trustees.

Now, if the IRDAI’s idea is to promote long-term health savings akin to the US, the question is, why restrict the investments to only debt instruments? Is it because the insurance industry makes money only on such traditional plans?

Traditional plans saw a regulatory tightening in 2013, but there were few changes made to the structure. Today, they still do not make any disclosure about portfolio or cost structure.

Now, if the new health savings accounts are modelled on these traditional plans, insurers may run them much like they have run their endowment and money back plans. Given that the kitty is intended for long-term savings, the new plan should offer debt and equity options for individuals to opt for different equity and debt combinations and also choose their investment managers. This will let individuals who have the stomach for risk make more investments into equity and benefit in the form of higher returns.

It is also imperative that the regulator puts a cap on the costs that can be charged on this product just as in the case of ULIPs and consider marketing them through post offices or rope in banks and third party distributors as in the case of NPS. Managing the money in the HSA should be left to asset management companies with a long track record.

HSAs are not sold as insurance-investment combos in developed countries. It doesn’t make sense do it that way in India either. Insurers should focus on making innovative risk covers and asset management companies should take up the task of managing people’s savings in the HSA. The regulator can consider distributing these accounts through post offices that have a successful model in selling small savings schemes or follow the path of the Pension Fund Regulatory and Development Authority (PFRDA).

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