India’s health insurance needs a taxation boost

 In recent months, health insurance has sparked significant and widespread conversation. Health insurance premium collections have led to the growth of the general insurance sector in the last financial year (1). There is murmur on the Central government’s GST collection on health insurance premiums (2) as well as the demand for reduction or complete removal of GST on health insurance premiums (3), has been creating headlines. 

Current state of health insurance in India

In the post-pandemic era, the health insurance segment has been among the fastest growing in the general insurance segment owing to increasing awareness among consumers on the need for comprehensive health insurance coverage as well as growing competition in the segment. Rising awareness of underinsurance and medical inflation has driven up demand for health insurance policies. Having said this, the distribution of policies remains uneven.

However, general insurance, under which health insurance is a category, has a mere 1 per cent penetration in the country (4). Close to 73 per cent of the country’s population does not have health insurance coverage of any kind (5). At the same time, India has one of the highest medical inflation rates in Asia, going as high as 14 per cent (6) .  To add to it, health insurance premiums in the current financial year are likely to be hiked by at least 5-10 per cent to ensure companies can deal with medical inflation. 

Amid growing medical inflation and low insurance penetration, there is a strong case for reducing or eliminating GST on health insurance premiums. This change would make health insurance more affordable and accessible.

Since 2017, life and health insurance premiums have been attracting a GST of 18 per cent. On one hand, we are striving for comprehensive universal insurance for all citizens, and, on the other hand, they attract GST at par with luxury goods. 

GST is a curious case where instead of coming down, it has gone up from 15 to 18 per cent when we moved from service tax to GST regime.  If we look at any developed economy where they have good public health care and social security, the Insurance premium tax varies from 0 per cent to 30 per cent but every country has treated health/life and income protection covers as an exemption. Most of the countries has zero- or single-digit GST/tax on health/life insurance and same approach is critical in India to reduce the impact of rising health premium and boost penetration.

Growing out-of-pocket healthcare expenses  

The need for affordable and accessible health insurance is underscored by the proportion of out-of-pocket expenses (OOPEs) incurred by individuals due to rising healthcare costs. India has the dubious distinction of having one of the highest OOPE expenses on health in the world (7).  The cost of medical treatments, including hospitalisation, surgeries, and medications, has surged significantly. Compounding the issue, the lack of comprehensive health insurance coverage for most people forces individuals to shoulder these expenses on their own. Further, it is estimated that at least 7 per cent of the country’s population is pushed into poverty each year due to healthcare costs. 

A study on corporate health insurance found that only 15 per cent of the country’s workforce is covered by employer-provided insurance, leaving a staggering 71 per cent of employees to pay for their healthcare expenses out of pocket. Even among those who have access to healthcare from employers, the willingness to adopt it varies based on age groups.   

Need for comprehensive employee insurance coverage 

India has one of the youngest populations in the world and is likely to employ as many as 962 million individuals by 2030 (8). Given the significant number of individuals that will be part of the workforce, it is prudent to create policies that ensure comprehensive employee insurance as part of corporate responsibility.  

Studies have proved that employee health insurance coverage not only enhances productivity by reducing the probability of employees falling sick (preventive medicine) and/or increasing the probability of a worker recovering from illness (curative medicine) (9). 

Through robust public-private partnerships and conducive policies that incentivize the adoption of comprehensive health coverage for employees, the government can accelerate the penetration and reach of such policies. Reduction in GST rates on health insurance premiums could propel this further.  

We are optimistic that the GST Council will take a decisive and favourable step by reducing the GST on health and life insurance to 5 per cent or lower. This move will significantly enhance access to quality health insurance for most of the country’s population a reality.

References:

(1) https://www.business-standard.com/finance/insurance/general-insurance-premium-up-13-till-february-in-fy24-shows-data-124031500017_1.html

(2) https://money.rediff.com/news/market/govt-collects-rs-8-263-cr-gst-on-health-insurance-in-fy24/13798920240805

(3) https://www.cnbctv18.com/business/finance/nitin-gadkari-letter-finance-minister-gst-removal-life-health-medical-insurance-tax-19452147.htm

(4) https://www.statista.com/statistics/1075179/india-general-insurance-penetration/#:~:text=The%20insurance%20penetration%20across%20India,insurance%20penetration%20is%20significantly%20low.

(5) https://www.business-standard.com/india-news/india-s-95-population-uninsured-73-lack-health-coverage-report-123121400936_1.html

(6) https://www.livemint.com/money/personal-finance/medical-inflation-in-india-reaches-alarming-rate-of-14-reveals-report-11700634947658.html

(7) https://www.niti.gov.in/sites/default/files/2023-02/Health-Insurance-for-India%E2%80%99s-Missing-Middle_08-12-2021.pdf

(8) https://cii.in/PublicationDetail.aspxenc=N2AFECpdUSEAU4Sf0cVnXQ0fwCqEZNJlYRn5N0OW5ly2sf/bUEP0qrysmip9/A637b9FIX2k/L4yUbBph3nudBpJhkUxHbkKYHbnNEFk0DEnAHA5SdxPxrqJWA21+Km+h84i7H9RJDkz7QzgjG257d1HCSWcFarYBbEyjTdN8dzzzeWZEK3PlOPh3MbD+Jh+

(9) https://www.sciencedirect.com/science/article/abs/pii/S0927537116300021#:~:text=By%20offering%2