Optimizing the use of existing pooled government funds

We motivate this short piece by first reminding readers of India’s poor health outcomes and related vulnerability of her people to financial distress. The end-goal of universal health care is a multi-year journey, which will require more resources dedicated towards health. But there are intermediate destinations along possible transition paths that increase the efficiency of the limited existing health care resources and could result in more equitable outcomes. Capitalizing on these relatively lower-hanging fruit can build support for much needed and otherwise seemingly intractable reform.

Poor health outcomes and financial protection

India’s health care system underperforms its low- and middle-income peers. For instance, in 2019, it had a Disability Adjusted Life Years Rate (DALY Rate) (i.e., the number of healthy life years lost on account of death and disability per 100,000 population) of 33,643. This is well above that of Vietnam (26,783), Colombia (24,212), and Thailand (29,338). Importantly, countries in South Asia with lower PPP-adjusted GDPs per capita (Purchasing Power Parity or PPP adjusts for differences in the purchasing power of each currency relative to the US$) have delivered better health outcomes than India has. For example, in 2019, Bangladesh at $4,964 with a DALY Rate of 27,077 had much better overall health outcomes than did India at $6,997. Amongst the important parameters which contribute to the DALY Rate is the Infant Mortality Rate (IMR), i.e., the number of children who die before the age of one per 1,000 live births. The 2019 IMR for India was 28, while it was 26 for Bangladesh, 16 for Vietnam, 12 for Colombia, and 8 for Thailand.

In terms of financial protection, Indian households pay a high 61 percent of total health care costs out-of-pocket. And while countries like Iran, China, and Thailand have all reduced out-of-pocket expenditure (OOPE) proportions for their households by more than 20 percentage points in the last 20 years, the Indian levels of OOPE, with just a 9 percentage point reduction, have fallen by less than half that number during the same period.

Underinvestment in health by the government and poor insurance penetration

Part of the problem is an inadequate level of investment by the Indian state and national governments in health and the very low levels of insurance penetration. While at an aggregate level, for example, the U.S. spends perhaps an excessive 16.89 percent of GDP on health and India a much more reasonable 3.84 percent, Indian government contributions only amount to a minuscule 1.18 percent of GDP, and, because of several structural rigidities, even the amounts that are allocated are not spent each year. This leaves a burdensome 2.3 percent of GDP, or 61 percent of the total to be spent as OOPE by Indian consumers, with insurance contributing only about 0.30 percent of GDP. In the U.S., despite the high aggregate spending on health, OOPEs account only for 11 percent of the total, with government and commercial insurance making up the difference. Health policy analyses and even a common sense understanding of the societal public health benefits, especially apparent during crises, suggest that something is very wrong with this picture.

There are bound to be strong political economy reasons why it has proven difficult to increase government expenditure on health, such as alternate demands from other sectors and poor allocational choices by the government of public funds. Let us put those aside for now and ask instead the following question: as part of articulating an institutional-transition path towards better health outcomes, and as we try to increase government health expenditures, what else might we do to improve health outcomes from current levels?

Low levels of efficiency, equity, and quality

It turns out that the monetary allocations towards health by the government are currently being used very poorly, leaving considerable room for improvement. Consider, for example, (1) the funds which are allocated to health by the government from direct and indirect tax receipts, and (2) the mandatory health insurance contributions by low-income employees in the formal sector.

The tax receipts are used by the ministries and departments of health at the national and the state levels to directly provide free health care services, with a focus on maternal and child health. While some very good work has been done with these limited funds, there is also a great deal of waste, inefficiency, inequity, and low quality associated with them. For example, in the southern states of Kerala and Telangana and most urban areas of India, government hospitals carry out large numbers of excess C-Sections, well above the WHO recommended rate of 10 percent, but have not shown concomitant declines in maternal and perinatal mortality rates. This is because most of these surgeries were unnecessary and because of poor post-operative infection control at these facilities. At the same time, the proportion of women who receive the recommended four basic Ante-Natal Check-ups (ANCs) in a state like Bihar is only about 25 percent despite the presence of a large field force of government nurses, midwives, and community health workers for whom this is a key responsibility. This severely limits how much progress can be made on maternal and infant mortality indicators in such states. Reducing the proportion of excess C-Sections that are carried out by government hospitals and increasing the number of ANCs that are carried out by government health workers would both save money and improve birth outcomes for women and children.

Low-income formal-sector workers make mandatory contributions that are used by the Employees’ State Insurance Corporation (ESIC), a government agency, to provide comprehensive health care to these workers and their family members, currently numbering over 130 million insured persons. ESIC is one of the most mature social insurance schemes globally and is the oldest health insurance scheme in India. However, it has a very poor track record of actually providing services to its insured populations with a claims ratio (i.e., the amount spent on the provision of health care services to them as a proportion of total premiums received) that has consistently remained below 50 percent. Because of this inability to provide care, driven in part by an unwillingness to build out an adequate provider network and the poor quality of services at the few locations it does have, over time it has built up a cash balance of close to $10 billion from unspent premiums, which continues to grow year after year. Low transparency combined with almost no accountability for service levels or outcomes has led to less than 50 percent of the health insurance premiums that are mandatorily collected from low-income families being used to offer health care services. This leaves these families with no choice but to fall back on OOPE to pay for the health care that they need over and above the amounts contributed by them to ESIC. By contrast, the Affordable Care Act in the United States, for example, requires that the claims ratio for any insurance scheme must be at least 80 percent and forces insurers to refund to consumers any shortfalls.

Additionally, the health expenditures of ministries and departments of the government are organized into fragmented programs and use archaic line-item budgets and input-based financing, such as on salaries, medicines, and equipment, to fund them. Detailed budgets are specified for each item of expenditure (running into hundreds of lines) which cannot be moved from one line-item to another. Little if any attention is paid to outcomes or system-level integration. Instead, these limited funds continue to be further and further sub-divided without any thought given to increasing the overall resource envelope allocated for health care by the government. For example, recently parts of these funds have been directed towards launching small demand-side schemes such as the Prime Minister’s Population Health Scheme (known in India as the PMJAY). If adequately funded, PMJAY is intended to allow low-income households to pay for in-patient health care in public or private hospitals of their choice. However, at the current level of funding, these schemes do not have the resources to adequately serve their target audiences and merely serve to further reduce and fragment the already limited health care budgets available to the state and national health ministries. The line-item, input-based financing approach is a product of history and would be hard to change without a strong reform effort. The fragmentation persists partly because it is reinforced through the ideas and funds from global institutional donors and multi-lateral institutions who are themselves organized similarly. India, despite its economic heft, continues to depend on this largesse for several of its critical programs. A systems view is hard to reconcile with donors and global financial institutions intently committed to their own narrowly defined sub-system agendas and where, unlike in Thailand for example, in part because of the strong presence and influence of global actors, independent domestic scholarship on this front has been slow to evolve in India.

Opportunities for improvement in efficiency and effectiveness of government expenditures

Even as the entreaties to state and national governments to allocate additional funds for health care continue, it is imperative to improve the efficiency and effectiveness of current government expenditures. There are several possible directions for this proposed journey. A few of them are mentioned here.

For example, the current approach of using archaic line-item budgets and an input-based financing approach, as discussed earlier, will need to be improved. This can happen through implementing better data systems along with an increased level of flexibility given to local decision-makers for moving between line items, or by pursuing an entirely new approach, referred to as strategic purchasing or purchaser-provider split. In a purchaser-provider split arrangement, the annual budgetary allocations to health are not transferred directly to ministries of health as is currently the case but are instead given to intermediary organisations such as, in the U.K., the NHS Trusts, which in turn pay providers on an outcomes basis. While countries such as Turkey, Thailand, and the U.K. have successfully implemented these new approaches, there are also countries like Sri Lanka and Cuba which have continued to work with the older line-item budgeting approaches and have consistently delivered good results. However, travelling down this pathway may present India with a Hobson’s choice and leave it no alternative but to focus on the more arduous and longer-term task of improving its overall “state capacity.” Taking the U.K.’s “internal markets” approach requires a level of state capacity that many Indian states do not have, but without enhanced state capacity, neither do the current approaches seem to be working for them and would almost certainly need to be revisited.

Another potential performance improvement measure, without necessarily revisiting the current “Old Public Management” style, could be to considerably enhance the use of technology, a natural advantage for India, within the existing government-managed delivery systems. One of the best examples of this is provided by Plan Nacer in Argentina, which was able to effect significant improvements in the health outcomes from its low-performing government-owned health system through careful and very gradual use of information technology (IT) in combination with other measures. In Plan Nacer, public health facilities were given low-to-reasonable performance targets, with very modest financial rewards to the facility for exceeding them but with the key provision that they would be audited against the data entered in the IT system before any rewards could be paid out and that there would be penalties for making false claims. This motivated staff to improve the uptake of these IT systems with the result that gradually they were the only ones being used for all record-keeping in the facility. Taiwan offers an example, albeit in the context of a much smaller country with a much higher implementation capacity, of how technology can transform the health care experience of an ordinary citizen. In Taiwan, everyone carries a National Health Insurance card which uniquely identifies them to the national insurance system and all claims are settled electronically on a near-real-time basis, with the result that there is a high level of customer satisfaction and a total administrative cost of close to only one percent. In India, ministries such as finance and railways and even municipal administrations have successfully incorporated highly advanced technologies into their operations. Unlike the health ministries which have approached this challenge using a program-by-program outsourced strategy, these other ministries and departments have made serious efforts at creating an integrated response, including by setting up dedicated information technology focussed organisations also referred to as “National Information Utilities” (NIUs) where necessary. The Indian Railway for example runs one of the most modern ticketing systems in the world through the dedicated Indian Railway Catering and Tourism Corporation (IRCTC). The Indian Income Tax Department runs a highly automated tax-filing system from e-filing to e-assessment and is a global leader. Working with the E-Government’s Foundation, over 2,400 municipalities across 16 states in India have moved towards complete automation of their administration.

Changing the way ESIC functions represents yet another pathway forward. Surprisingly, the Labour Unions who represent the very workers who are forced to contribute to this pool and whose representatives are Board members of ESIC have thus far for some reason allowed this situation to persist. Reducing the size of the Board from the current 59 to a much smaller number which has real power to hold the management of ESIC accountable, and developing new contracting arrangements with a wider group of health care providers using more of the managed care approach that Thailand has taken, are both immediate steps that ESIC could take. However, given little or no internal momentum for reform within ESIC, much pressure would need to be applied on them through the Labour Ministry and the unions.


Optimizing the use of existing pooled funds such as those being gathered through taxation and contributions from formal sector low-income workers, by significantly improving the purchasing function needs to be a high priority as part of a comprehensive approach to health system reform. This will ensure that more value is urgently derived from these underutilized and poorly designed and deployed pools. And, as importantly, these critical reforms will build much-needed confidence and send a clear signal that directing higher levels of tax-based allocations towards health care by the government can and will have a strong positive payoff where it is most needed.

Making the changes that are required will, however, need focused attention and support from the political establishment because there is likely to be considerable resistance to change from the current structures. And while there is no doubt that there is a recognition of the importance of health amongst the politicians and the bureaucracy as a whole, it has not yet become a central part of the national and state-level “decision agendas.” With the COVID-19 crisis having raised the profile of health-related issues, this may well be the moment when the three “streams” (of problem, potential solutions, and political environment) can finally come together to propel action.

Tarun Khanna is a cofounder and board member of Jana Care and Axilor. The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. Other than the aforementioned, they are currently not officers, directors, or board members of any organization with an interest in this article.