Concept document:
Medical Cost Index Calculation in India-Possibilities and proxy methods
1. Introduction
a. Medical insurance is an effective mechanism used by Institutions and individuals to meet their unexpected medical treatment/ hospitalisation costs.
b. Major factors influencing medical care include general price inflation, increase in health hazards, improvement in medical technology, accessibility of information, infrastructure developments, fiscal policy, social structures and mobility
c. Considered as a major necessity of the population through any one of the parties referred in (a)
d. Affordability, structure and cost are important to ensure value for money
e. Precision in pricing of a medical insurance product is important and requires update on the cost escalations of components of medical benefit.
f. Generally, the claim expenses increase year by year owing to some/ all of the factors in (b) above.
g. Medical cost escalations can be viewed as increase in average claims/ increased utilisation of services.
h. Increase in average claims as a result of CPI/ WPI or changes in government policies on taxation or demand/ supply gap or all of these.
i. Increased utilisation of services due to changing product features, anti-selection, lapsation or all of these.
2. Objectives
a. To understand the current practises of setting assumptions for pricing and reserving of health products in Indian health insurance market.
b. To identify and understand important factors affecting medical cost in India.
c. To understand reliable sources of information to calculate medical cost index in India and its regular and long term effectiveness.
d. Proxy methods / models for estimating medical cost escalations.
e. To understand influence of utilisation of service factor on medical cost escalation- average risk premium to average claim, cost ratios, claim frequencies etc.,
3. Components for calculation of Medical cost index in actual terms
Components of medical cost can be broadly put into the following baskets.
a. Hospital charges- include room rent, board expenses
b. Doctors/ technicians fees
c. Drugs
d. Equipments.
e. Others- include nursing, ambulance etc.
4. Data sources and limitations
a. Table 43 , Table 49 and Table 75 published on 1st Jun’12 in IRDA web site as a part of Hand book on Indian Insurance statistics 2010-11 full report provide:
ü Table 43- No. Of schemes/ No. Of policies/premium amount under health insurance for years 2009-10 and 2010-11 by government schemes and others under all public and private insurers.
ü Table 49- Net earned premium/ claims incurred/ claims ratio for years 2009-10 and 2010-11 11 by government schemes and others under all public and private insurers.
ü Table 75- Third Party administrators-number of claims received & duration wise settlement of claims
b. Data under part 3 above is available with hospital records, third party administrators, Insurers and re-insurers.
c. Collecting relevant information/ data to meet the objectives of the paper is limited to the extent of availability of clean data and its sharing from all referred in item 4(b) above.
d. Most of items under part 3 are directly related to economic factors like price inflation, GDP growth etc., need to find out the correlation factors.
e. To establish any correlation between historical data and economic factors also require claim experience information from the service providers.
f. The utilisation of service factor is inherent in the data of all service providers in different proportions depending on product features/ lapse experiences.
5. Measuring medical cost inflation
a. Different components in item (3) take different proportions in the total cost.
b. Increase in cost of each of the component is caused by any combination of factors referred in 1 (b)
c. The base index and inflation index can be arrived by broadly identifying the contributions from all components to the total cost and cost escalations applicable for each of them during the years under observation.
d. The following table is an illustration of calculation of medical cost index:
Items / Hospital charges / Physicians/technicians fee / Drugs / Equipments / Others / Medical cost index
Proportion
to total cost-Base year (A) / 30% / 40% / 15% / 10% / 5% / 100%
Increase in cost during First year (B) / 10% / 20% / 7% / 35% / 10% / =sum[A*(1+B)]
=116%
Increase in cost during second year (C ) / 13% / 15% / 7% / 28% / 12% / =sum[A*(1+B)*(1+C)]/ sum[A*(1+B)]
=115%
Cost inflation for 2 years / 24% / 38% / 14% / 73% / 23% / ==sum[A*(1+B)*(1+C)]
133%