Reimagining Commercial Health Insurance in India: A System-Dynamics Approach to Complex Stakeholder Incentives and Policy Outcomes

Most low- and middle-income governments are unwilling and unable to adequately fund their health systems using tax resources. Despite this route’s popularity in public discourse, it is neither a feasible nor a desirable route for financing Universal Health Coverage (UHC), given competing public finance priorities and limited citizen demand, among other challenges. It thus becomes essential to study the underlying mechanisms behind commercial health insurance and offer citizens the best possible product, which ensures that they not only receive a high degree of protection from health and financial risk on a sustained basis but also find reasonable access and support to improve their health outcomes. In this paper, we build a system-dynamics model that simulates the aggregate behavior of the Indian health-insurance industry, with interacting feedbacks between decisions by stakeholders such as the insurer, healthy and chronically ill populations, and the regulator to outcomes like insurance penetration among segments, overall coverage, health status over the long run, a mechanism of market-discovered premium, and financial viability of the private insurer. We then investigate policy choices and scenarios to explore contrast between design choices and ideal or targeted states of this market, such as a market with 100% enrollment, risk selection by insurers, group insurance models, and managed care, and study the impact on our outcomes of interest, i.e., insurance penetration and pricing, the financial sustainability of the insurers, and the population’s health outcomes. The simulations show that even while insurers and the different population segments optimize for their respective near-term objectives, the best outcomes for all come from the managed-care policy option, which has greater insurance penetration, lower premiums, higher profitability for insurers, and better long-term health outcomes. All other choices and scenarios yield suboptimal, imbalanced systemic outcomes. We thus recommend managed care as a desirable policy alternative for low-income countries intending to improve UHC by leveraging commercial health insurance.