THE BLOG
11/17/2014 01:10 pm ET Updated Jan 17, 2015

India's Quest for Universal Health Coverage: The Importance of Choosing a Purchaser-Provider Split (Part 1)

Part 1: India at the Crossroads in Its Quest to Achieve Universal Health Coverage -- The Big Questions
(Part 2 explores which provider-purchaser approach is optimal for India.)

By Robert Hecht, Khizer Husain, Stephanie Sealy, and David de Ferranti

As India emerges from its recent elections, the new Prime Minister Narendra Modi and other senior officials face a series of major decisions on the future of the country's health system. The previous government was committed to more than double public spending for health in a quest to achieve universal coverage over the coming decade. This provoked a strong debate regarding how much of this funding should flow through historic "supply-side" health budgets to government health facilities, and how much should be channeled into new "demand-side" mechanisms, especially government-sponsored health insurance in which there is a split between purchasers and providers of care.

What position will the new prime minister take on this issue, which is critical to the future of India's 1.2 billion people? He has broadly indicated that he favors a continuation of the previous government's policies of increased public spending and wider guaranteed health care coverage, but his exact position on the demand vs. supply-side focus and on public insurance is still unclear. The new finance minister's budget speech, delivered on July 10, 2014, made no mention of health financing reforms and only referred briefly to boosting investment in other areas including research, medical colleges, regulatory bodies, and TB control. More recent pronouncements from August suggest that Mr. Modi favors an expansion of public insurance but remain vague on the details.

Based on India's history and the state of its health sector and the lessons from global experience with a purchaser-provider split (PPS), we would argue that India should adopt a policy featuring non-competing state government health insurance pools, which purchase services from a mix of both public and private providers. If adopted, such a policy would generate significant improvements in access, quality of care, and efficiency for the country's billion-plus citizens.

India's quest for Universal Health Coverage
India's Twelfth Five-Year Plan (2012 - 2017) takes a bold step towards universal health coverage (UHC), committing India to double public expenditure on health -- from 1.2 percent to 2.5 percent of GDP over the next five years to over 3 percent by 2022. But how should these extra funds be deployed?

Supply-side approaches are the dominant form of government health financing in India today but have generally produced poor results in terms of health service coverage, outcomes, and client satisfaction. Partly in response to this situation, demand-side approaches have become more widespread in recent years, mainly through the emergence of Rashtriya Swasthya Bima Yojana (RSBY), a centrally-sponsored health insurance scheme, and the use of vouchers such as in the Janani Suraksha Yojana (JSY) program. The new tax-funded insurance schemes, summarized in Table 1, offer a paradigm for health financing that is different from India's traditional supply-side approach: By targeting India's most disadvantaged group, the below-poverty-line (BPL) population, they allow patients to access a mixture of accredited private and public hospitals using bundled rates of payment.

The fundamental question: purchaser-provider split?
The underlying policy question for India is whether some substantial part of the financing and purchasing of health care should be separated from the delivery of health services, or whether the two should be kept integrated under a single institution in each state. Unless policymakers opt for a PPS for a major share of health goods and services, the traditional Indian model of "supply-side" financing is likely to be followed: Public money will flow through state health ministry budgets and will be allocated to government health centers, hospitals, and other programs based on prior years' allocations and not as a function of performance -- quantity, quality, and efficiency of services provided.

If, alternatively, emerging and other possible forms of the PPS are pursued as the dominant approach at national level and in India's states, the fundamental logic for health care financing in India will shift toward patients' demand for (and use of) care. The door will open for public revenues to be pooled in state insurance funds, as has started to happen under RSBY, but on a larger scale. The managers of these funds could then purchase care from a mix of government and private providers using mechanisms that better promote access, efficiency, and quality.

Further questions on a PPS to achieve Universal Coverage
If a PPS is adopted as policy, Indian decision-makers will face three additional design questions: Should the purchasing agency in each state be attached to the health ministry or independent of it? Should it be a government entity or some kind of parastatal organization? And, should the government purchaser use private third party companies to carry out part of its work, such as contracting and claims adjudication, or should these functions be performed in-house by a government or quasi-public body?

We argue that demand-side financing and a PPS are needed to drive deep and lasting improvements in government-financed health care in India. If these instruments are not utilized, we do not think the country will be able to harness increased tax funding for health in an efficient and effective manner, overcoming the problems that have chronically plagued India's public facilities: high levels of health worker absenteeism, shortages of medicines, and low quality of care.

India has a small but growing body of experience with PPSs under RSBY and several additional public insurance schemes tailored to the states of Andhra Pradesh, Tamil Nadu, and Karnataka. Evaluations to date show generally positive but mixed results. Some studies point to expanded health care utilization by the poor and improved patient satisfaction. Other studies indicate that RSBY may be leading to cost escalation and the use of medically unnecessary care, and cite cases of fraudulent practices by certain private hospitals which are participating in the schemes. These are problems that will need to addressed as India expands demand-side mechanisms incorporating a PPS.

(Please read part two, which explores the suitability of different provider-purchaser approaches for India.)